The blockbuster $37.2 billion takeover of components maker Precision Castparts by Warren Buffett’s Berkshire Hathaway group has the aerospace and defence industries on course for a record year of mergers & acquisitions (M&A) activity – but even without that “extraordinarily unique” deal, 2015 is set to be a “banner year” for company wheeling and dealing.
And, adds Scott Thompson, leader of consultancy PwC’s USA aerospace and defence assurance practice, next year looks likely to continue the trend of growing dollar-value M&A activity rising from the trough of 2013.
M&A activity is an important signal of the health of an industry, because it shows that buyers and sellers both see attractive prices – meaning buyers perceive good growth prospects and sellers can refocus portfolios or exit investments at a profit. And, the interest of financial investors like Buffett – noted for holding companies rather than buying and selling quickly to make trading profits – shows confidence in the long-term prospects.
Thompson was speaking on the back of new PwC figures that show the first half of 2015 to have been marked by $12.4 billion spent on 19 large aerospace or defence deals, and that's without the Precision purchase, Precision's own planned $550 million takeover of machined components maker Noranco, announced in late July, or the week's other M&A story, the acquisition by UK aerospace firm Meggitt of Cobham’s advanced composites business in a $200 million cash purchase.
He notes that the acquisition of Precision – for $32.5 billion, or $37.2 including debt – is worth twice the previous sector record, which was Pratt & Whitney, Sikorsky and Hamilton Sundstrand parent UTC’s 2012 takeover of Goodrich.
Buffett's purchase of the Portland, Oregon, components manufacturer – where aerospace sales account for about two-thirds of its annual revenue of some $10 billion – is unusual, making it an unreliable indicator of underlying trends.
But, says Thompson, the “facts persist”: commercial aerospace is attractive. Prices are expensive, he notes, but with so much growth built into the Airbus and Boeing order books and all forecasts of continued global airliner demand over the coming decades, deals can be done.
Buffett certainly sees the upside of his Precision investment, calling the company “the supplier of choice for the world’s aerospace industry”. That long-term faith in Precision, and aerospace, is in any case indicated by the $235 per share Berkshire will pay, a premium of about a fifth over the firm's closing price before the deal was known.
Richard Aboulafia, a Washington, DC-based analyst with consultancy Teal Group, says: “Part of me was surprised for a deal of this magnitude to take so long with private capital.” Aerospace, he stresses, is a “safe haven” for investors who are sitting on large cash piles but struggling to find good returns; commodities, technology and emerging markets are all down, and even gold – briefly a safe haven following the financial crisis – has tanked.
“We are the best-looking cow at the fair,” he says of aerospace.
Precision’s aerospace business, he adds, is almost exclusively in supply to aircraft and engine makers, so Buffett may look for ways to increase its exposure to the aftermarket, traditionally a significant profit centre for parts suppliers. Ultimately, that OEM focus means Buffett is placing a “big bet on commercial airliners”, and, says Aboulafia, the skies ahead are not without dark clouds.
Looking at aerospace through his particular prism of aircraft demand, Aboulafia notes that the real driver of new aircraft orders is the differential between fuel prices and interest rates. If fuel prices are low and interest rates rise – highly likely conditions in 2016 – that differential narrows: “The jaws snap shut, and that’s not good.”
Whether Buffett returns to the aerospace market soon remains to be seen. Its new acquisition will continue to trade as Precision Castparts and maintain its Pacific Northwest headquarters. The deal, which needs to be approved by its shareholders and should close in the first quarter of 2016, will take a chunk out of Berkshire Hathaway’s $67 billion cash pile, and Buffett has been quoted as saying he’ll have to “reload” before doing another major deal.
But the prospects for other financial investors to take note of this takeover and look with some urgency for their own move on aerospace must be great. As Thompson observes, cash-rich investors are “hungry”.
Source: FlightGlobal.com
