As DSEI 2013 approaches, IHS analyst Guy Anderson assesses the context behind recent mergers and acquisitions activity in the defence and security sector.

Mergers and acquisitions (M&A) activity in the defence, security and military aerospace markets remained true to trend during the second quarter of the year. Activity was up on the first three months, but consistent with the last four years and reflecting a market that has yet to achieve a meaningful recovery following the post-2008 slump.

Activity remained characterised by relatively small in-fill acquisitions rather than transformational deals, while efforts by defence companies to increase exposure to commercial markets ranging from civil aerospace and satellite communications to recreational ammunition drove deal volumes.

Strong consolidation activity among the lower tiers of the defence market continued in the West during the three

months to 30 June. Company failures, meanwhile, continued to provide opportunities.

Beyond Europe and North America, which continued to account for the lion’s share of transactions, consolidation continued apace, in South Africa and Russia in particular.

August 2013

IHS Aerospace, Defence & Security

Analysis: 2013 Defence Sector Mergers & Acquisitions

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IHS Analysis: 2013 Defence Sector Mergers & Acquisitions

Activity during the three months was also notable for the potentially significant deals in the naval sector that failed to proceed. BAE Systems’ long-running efforts to expand its US ship-repair interests through the acquisition of Marine Hydraulics finally ended in the face of opposition from US regulators. In Japan, talks to merge Kawasaki Heavy Industries (KHI) and Mitsui - a transaction that would have created a naval shipbuilding behemoth - collapsed, costing the president of KHI his job.

IHS recorded 37 deal announcements in the defence and security markets during the second quarter of the year: up from 21 in the first quarter. Total activity for the first six months (58 deals) was comparable with the first half of 2012 (59 transactions) and 2011 (61 deals).

Aggregate deal value in the second quarter of 2013 was USD2.7 billion: a figure buoyed by the announcement of the USD600 million purchase of aerospace component company Permaswage by Precision Castparts in the United States.

The average transaction value was, however, a relatively modest USD140 million: a figure roughly in line with levels of recent years.

Targets

Companies with exposure to the C4I domains remained in favour during the quarter, accounting for 40% of transactions. There was a notable emphasis on intelligence service providers with notable deals including

Raytheon’s purchase of US-based Visual Analytics Incorporated and the acquisition of the Datong organisation by Seven Technologies Holdings in the UK.

Satellite communications targets, meanwhile, continued to feature prominently. UK-based Inmarsat acquired Australian satellite communications firm TC Communications, while South Africa’s Denel was cleared to absorb national satellite-maker Sunspace.

Subsystems manufacturers, for their part, accounted for 43% of deal targets during the second quarter of the year. The emphasis was heavily on providers of aerospace components, notably in the propulsion arena. Examples included Precision Castpart’s USD600 million purchase of Permaswage (a supplier of fluid fittings for

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IHS Analysis: 2013 Defence Sector Mergers & Acquisitions

military and commercial aerospace markets); UK aerospace engineering firm MB Aerospace’s acquisition of US-based aero engines component manufacturer Delta Industries (a supplier to the US Department of Defense); and in France the acquisition by Zodiac Aerospace of La Jonchere: a French manufacturer of ducts and flexible joints for aerospace and defence applications.

Buyers

Middle- and lower-tier defence contractors accounted for more than half of transactions during the second quarter: a sharp increase on recent quarters that reflects the gathering pace of lower-tier consolidation in both aerospace and defence domains.

Acquisitions by larger organisations during the three months to 30 June included Honeywell’s purchase of chemical, biological, radiation, and nuclear (CBRN) protection specialist RAE Systems (valued at USD340 million); Cassidian’s addition of Arkoon Network Security to its cyber-security portfolio (USD18 million); Raytheon’s acquisition of Visual Analytics Incorporated; and Saab’s purchase of technical manuals producer TIKAB. The deals were small in scale and the absence of cross-border activity among upper tier buyers was notable.

Consolidation through adversity

Examples of consolidation driven by financial challenges were numerous during the second quarter of the year. In the United States Cubic Defense acquired the assets of simulation products specialist Advanced Interactive Systems through a bankruptcy auction. In South Africa troubled Sunspace, which had limped along under business rescue legislation, was taken under the wing of state-owned Denel.

South Africa’s Paramount, meanwhile, announced in April that it would acquire Advanced Technologies & Engineering (ATE). The company behind the South African Vulture unmanned aerial vehicle platform, ATE entered a business rescue programme for the second time in November 2012.

Efforts by core defence companies to gain greater exposure to recovering commercial markets continued during the second quarter, with European technology

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IHS Analysis: 2013 Defence Sector Mergers & Acquisitions

group Thales and US ammunition specialist ATK providing two examples. Thales completed the acquisition of Egis, a French air traffic management IT firm, in June: a deal that reflected Thales’ stated belief that air traffic volumes will double during the next 30 years. ATK, meanwhile, acquired Caliber: the parent company of hunting rifle manufacturer Savage Sports Corporation.

Examples of large-scale organisations reducing exposure to defence markets were also apparent. Rolls-Royce sold its 50% stake in the RTM322 helicopter engine programme to joint venture partner Turbomeca, arguing that it needed to “concentrate on the core defence programmes that we believe offer us the best future

potential” while deciding “where to grow and where not to”.

The deals that got away

Two transactions with the potential to shift the naval markets of the United States and Japan floundered during the second quarter.

BAE Systems conceded at the close of June that its USD69 million purchase of Virginia-based Marine Hydraulics International had no prospect of proceeding, given the opposition of the US Navy and the US Department of Justice on the grounds of competition concerns. The transaction would have been a significant addition to the UK-headquartered group’s existing ship repair interests.

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IHS Analysis: 2013 Defence Sector Mergers & Acquisitions

In Japan, meanwhile, KHI announced in mid-June that it had terminated negotiations with Mitsui Engineering and Shipbuilding over a planned merger that would have created Japan’s second largest naval shipbuilder.

KHI announced that it had replaced its president, Satoshi Hasegawa, and two senior executives over their role in pushing for the merger. Had it proceeded, the KHI-Mitsui merger would have created a company with combined annual sales of about USD19 billion (KHI with USD13 billion, Mitsui USD6 billion), behind only Mitsubishi Heavy Industries (MHI, with USD34 billion) in terms of Japan’s biggest commercial/naval shipbuilder.

This analysis is abridged. The full profile is available within IHS Jane’s Defence Industry & Markets Intelligence Centre.

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IHS Analysis: 2013 Defence Sector Mergers & Acquisitions

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