Mergers and acquisitions (M&A) activity in the civil aerospace sector appears set to continue on a bullish track driven by the prospect of further strong airliner sales, according to Michael Richter, head of aerospace and defense investment banking with financial advisory and asset management group Lazard. Speaking to AIN just ahead of this month’s Paris Air Show, he explained that huge reserves of low-interest capital are fueling desire for takeovers by strategically motived aerospace firms and investors from the financial communities.
“The commercial aerospace industry continues to experience a period of confidence that began in the second half of 2010, driving strong M&A [activity],” he said. “Industry fundamentals remain strong and stock prices [for publicly traded aerospace firms] are at or near 52-week highs.”
By fundamentals, Richter meant the ever-increasing backlogs of orders for new airliners, driving high production rates that create excellent “visibility” in terms of companies’ confidence about continued strong demand. “There are many positive aspects [to the market] still intact, but in fact many of these are even stronger now [than over the past couple of years],” Richter said. “From a seller’s perspective it is an ideal time to go to the market [to sell assets] and the financially sponsored market is strong due to loose debt covenants and the availability of money. This is boosting base valuations of companies, and from a pricing perspective it is strong with greater visibility. In fact, this is as strong as it was in 2007 [before the financial crisis] and from a pricing perspective it’s strong. It’s simple to agree on price [for civil aerospace assets], unlike in the defense market.”
At the same time, the desire of OEMs to deal with a smaller number of qualified vendors inspires continued consolidation among manufacturers. “This has made the supply chain stronger,” commented Richter. “Yes, in some cases, that has concentrated more power with larger suppliers [in terms of prices], but OEMs are more willing to live with this than having a disjointed supply chain.”
Generally, Richter expressed a positive outlook for the financial health of airlines, although he acknowledged that profitability varies among geographical regions. For example, North American carriers continue to show strong profits compared with those in Europe, Africa and Latin America. He sees trends such as increased fleet use boosting the aftermarket business of OEMs and maintenance, repair and overhaul providers.
However, Richter recognizes some negative factors in the civil aerospace and air transport markets as well. “There are definitely risks and cracks in the system,” he acknowledged, pointing to the fact that the assured growth he sees depends on broad global economic health that can by no means be taken for granted, especially given political instability in some regions. “The overall strength of the order books is creating high levels of visibility, and this is leading to higher volumes of transactions,” he said. “In the past there was more of a clear boom and bust cycle but now eight years in the market that should have trended down by now has become a super-cycle.”
Richter also pointed to delayed new airliner programs such as Bombardier’s CSeries, UAC’s Irkut MC-21 and Comac’s C919 as potential “cracks in the system” for aerospace manufacturers depending on those platforms. “Another crack is the [potential problems associated with] operators moving from one set of platforms [aircraft] to another,” he said. On balance, however, the Lazard executive feels that “aerospace is one of the true sweet spots in the entire capital goods food chain, other than maybe sectors such as chemicals.”
Over the past 11 months, Lazard has helped facilitate deals such as the $3 billion takeover of Firth Rixson by metals group Alcoa and the $500 million sale of Sargent Aerospace and Defense by Dover to RBC Bearings.