A strong appetite for mergers and acquisitions is fuelling the view that the industry's upturn has a number of years to run yet
Airbus and Boeing's flurry of orders stole the headlines at this year's Paris air show, but behind the scenes it was the progress on mergers and acquisitions, and a sense that there is more consolidation of the industry to come, that has convinced the aerospace sector it is a long way off its next downturn.
Beyond the high-profile flying displays and signing ceremonies, analysts reported real progress towards the further consolidation of the sector. Strong interest in mergers and acquisitions suggests that the current upturn will continue for some years to come.
Of course, the operational changes Airbus is planning as part of its Power8 restructuring plan will play a significant role in reshaping the industry in Europe this year as the company moves towards partnerships and sales of some of its manufacturing sites.
But elsewhere in 2007, the sector has already seen its fair share of high-profile deals (see table). The former Smiths Aerospace arrived at the show with a fanfare, newly rebranded as GE Aviation's Systems division. And Meggitt completed its acquisition of K&F Industries shortly after, cementing its US presence and filling out its product lines.
And there is more to come, says Michael Richter, co-president and head of aerospace and defence investment banking group at Jefferies Quarterdeck. Private equity investment is set to play an increasingly important role as value multiples of aerospace deals maintain extremely high levels, with US firms leading the charge, he says. First to emerge after the air show was the proposed takeover of Stork by private equity company Candover.
Buying spree
Meanwhile, the spate of deals involving Middle Eastern cash is likely to carry on. Burgeoning aerospace giant Dubai Aerospace Enterprise is expected to continue its buying spree, which it began with the purchase, as part of a consortium, of SR Technics last year. "DAE has tens of billions to spend," says Richter. "And there is a positive deal-making environment." Dubai International Capital and Abu Dhabi's Mubadala are also likely to gain importance in the sector. Richard Apps and George Burton, directors of UK-based consultants Counterpoint Market Intelligence, say: "The Middle East, and DAE in particular, are active buyers - they want to be more than private equity buyers, and are buying sizeable businesses."
Apps and Burton also predict more deals in the engine components and aerostructures sectors, beyond the "one-off" reorganisation of Airbus's sites as part of Power8.
Analyst Robert Stallard of Bank of America says: "With strong order intake, but restrained production increases by OEMs, we see a 'longer and stronger' aerospace upcycle, supporting our positive stance on the sector." He expects the upcycle to be "longer and stronger" than in the late 1990s, "with a production peak still potentially a long way off in 2011".
Stallard reckons it will be at least three years before the cycle's downturn begins. Bank of America has almost doubled its new order forecast for 2007 from 1,000 to 1,900 new aircraft after this year's show. "We have yet to meet any management that believes we are close to the top of the cycle," he says, "with several years of healthy growth still ahead."
Source: Flight International
