Defense/Aerospace Industries

[crable]

• MAY 24, 2010, 6:04 P.M. ET
Aerospace-Defense Merger Deals Gather Strength
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By Christopher Hinton
Mergers in the aerospace and military-contracting industries are gaining traction after a steep slump last year, with private equity stepping in to finance deals where post-recession credit markets fear to tread.

So far this year, the sectors have seen 35 mergers totaling $2.33 billion, according to FactSet Research, a provider of financial and economic data. That compares with 25 deals worth $96.2 million over the same period in 2009--the lowest level in a decade.

The value of the most recent transactions also surpassed the 2008 period, but was far below a 2007 peak of $11.76 billion.

"Market confidence has picked up, and though there will be substantial pressure on defense spending going forward, there's still a lot of faith in the overall global market," said Jon Kutler of the investment firm Admiralty Partners, in an interview.

Acquisition data for the latest quarter comes in at the high end of historical activity, according to a recent report from PricewaterhouseCoopers. But even though credit markets have thawed from the freeze last year brought on by the financial markets crisis, brokers are still scrambling for ways to finance mergers and acquisitions, leaving a gap increasingly closed by private equity.

During the first quarter, private equity raised 37.5% of the value for deals worth over $50 million, versus 11.5% in 2009 and 12.8% in 2008, the research firm said.

"With the capital markets still in repair-and-heal mode, buyers and sellers are likely seeking creative structures, including minority stake purchases and joint ventures, to complete deals," PricewaterhouseCoopers said. "We believe that participation in the [aerospace and defense] mergers and acquisitions market by financial investors will continue to increase."

Private equity has definitely stepped in, said Admiralty Partners' Kutler, and they are taking advantage of some real bargains.

"The high-priced larger deals are what's grabbing the deadlines, but below that is softer pricing," he said. "Aside from highly differentiated companies, middle-market companies that wanted to sell did not, and that got them worried and their pricing has come down."

Buyers have been focusing on companies that offer niche products, especially in the fields of intelligence, surveillance and reconnaissance, and cyber security, according to Kutler. They have all remained strong areas of growth despite a general decline in military spending.

Acquisitions are also being used to expand market access in foreign countries, particularly the U.S., which is by far the world's largest buyer of weapons and technology.

CGI Group Inc. (GIB) announced the sectors' largest deal this year, agreeing to buy Stanley Inc. (SXE) for $1.1 billion. The target company made a name for itself developing technology and software for the U.S. military that provide soldiers on the battlefield with intelligence and communications support.

That was followed by a $984 million deal for Vought Aircraft Industries Inc. The acquirer, aircraft parts and services provider Triumph Group Inc. (TGI), said the purchase would increase its business exposure to Boeing Co. (BA), which has said it's at the beginning of a strong aerospace cycle.

There have been four mid-range merger announcements this year worth between $35 million and $98 million, according to FactSet, including the U.K.-based Charming Group Plc agreement to buy Allied Defense Group Inc. (ADG) in Vienna, Va.

-Christopher Hinton; 415-439-6400; [e-mail]