The mergers and acquisitions (M&A) tide is still rising in the commercial aerospace sector, according to Michael Richter, managing director and head of aerospace and defense with investment bank Lazard. As he prepared for a busy week at this year’s Farnborough International airshow, Richter told AIN that he sees deal-making activity rates higher than they were at the time of the 2012 Farnborough show and also ahead of last year’s Paris Air Show. In his view, the civil aircraft manufacturing sector remains markedly more dynamic than a still somewhat uncertain defense sector.
According to Lazard, commercial aerospace M&A is being driven largely by the quest for consolidation in the supply chain and greater certainty over positive build rates for products. Visibility—meaning a high degree of certainty—over airliner build rates is a key factor supporting the bullish M&A environment surrounding airliner manufacturers and their suppliers.
“The overall health of the [airline] industry is about as strong as we’ve seen it and so there is strong visibility on the order books [of airframers],” Richter told AIN. “There is no confidence that 2014 and 2015 [production] is sold out and 2016 looks good, with diminished visibility for 2017 and 2018. This all makes it easier for [M&A] buyers and sellers to come to agreement on price.”
For the most part airliner order backlogs have held up well, but Emirates Airline sprung an unwelcome surprise when it cancelled its order for 70 Airbus A350XWB widebodies. “I don’t think it’s clear that this represents a deeper-rooted problem,” said Richter in an interview last month. “It seems to be more to do with Emirates not needing as many aircraft as it had ordered earlier. Time will tell and if there are other cancellations the situation will have to be reviewed.” He added that the continuing squeeze on airline profit margins simply encourages them to invest in new, more fuel-efficient aircraft.
According to Richter, much of the M&A activity in the past 12 months has been concentrated on the aerostructures sector, which he described as having “a pivotal position in the supply chain.” From an investor’s point of view, these tier one-and-a-half and tier two manufacturers are attractive propositions in part because they build parts specified by the tier one manufacturers rather than shouldering the principle design risk for programs.
In March, Lazard advised Marvin Engineering on the $625 million sale of California-based Aerospace Dynamics International to Precision Castparts. The company makes items such as landing gear beam assemblies for the A350. In June last year, Lazard also assisted in the $600 million deal that saw Precision Castparts buy fastener manufacturer Permaswage.
Favorable conditions in the debt markets are spurring private equity groups to get more active in aerospace M&A deals. An example of this was Warburg Pincus’s recent purchase of aircraft parts maker Wencor Group.
“Strong [build rate] visibility and order books mean banks are very willing to lend capital [to fund acquisitions],” said Richter. So whereas investors might previously have been able to secure loans of up to three or four times an acquisition target’s EBITDA (earnings before interest, taxes, depreciation and amortization), Lazard has seen cases lately where up to seven times this measure has been provided in support of deals.
“Aerospace is one of the few bright spots and there are now few other sectors attracting so much debt capital,” said Richter. At the same time, lenders have loosened the covenant terms under which capital is provided and this, in concert with historically low interest rates, has helped to push up purchase prices for strategic acquisitions.
So does any of this M&A activity materially contribute to the overall health of the aerospace and defense industry? “Deep down the OEMs do appreciate what we are doing here because it reduces the points of failure,” concluded Richter. “They will have more capable, better capitalized suppliers instead of disparate and under-capitalized suppliers, presenting much less risk of a supply-chain shock caused by smaller companies lacking the capital they need to increase production rates.”