In July 2007 Flightglobal.com wrote: "A strong appetite for mergers and acquisitions is fuelling the view that the industry's upturn has a number of years to run yet."
Twelve months later, at a Farnborough air show held in a climate of almost existential angst owing to soaring fuel prices, we spoke to several aerospace-focused investment bankers and reported them to be in a "sanguine, even upbeat, mood".
But now, with credit crunching, stock markets in a nose dive, airlines in pull-your-hair-out distress and companies clearly jittery about what is coming next, should we finally call time on the mergers and acquisitions cycle?
Apparently not. Discuss the state of the world economy with aerospace executives today and two themes consistently emerge. One is that defence spending looks solid. Two is that the Airbus-Boeing orderbook is so large that, for suppliers, the civil side of the business also looks solid.
Programmes such as the Airbus A380 are ramping up production rates |
David Baxt, group head at Jefferies Quarterdeck, the aerospace group within Jefferies investment bank in New York, says that with 7,000-plus airliners on order it would take a historically unprecedented spate of cancellations to undermine the industry.
Baxt points to the worst-ever downturn cancellation rate of 11%. Even if 30% of today's orders were cancelled the industry will be building aircraft to 2013.
CONFIDENCE DRIVERS
Share prices have been hammered, but big companies are still confident in the aerospace business cycle. They also have access to capital and, often, strong balance sheets, so that confidence still drives acquisitions.
Since prime contractors and tier 1 companies are looking to deal with fewer suppliers, a drive to consolidate around systems capabilities will continue. Small companies are not good at handling the revenue risk-sharing business model that is taking hold in aerospace, so Baxt believes they have a motivation to sell.
Generally, says Baxt, acquiring companies are "trying to achieve real estate" on airframes - watch for acquisitions that build capabilities targeted at business jets, where many new airframes are in the pipeline.
Two recent acquisitions make Baxt's point about acquisitions momentum. One is General Dynamics' $2.18 billion takeover of Switzerland-based business aircraft services provider Jet Aviation, which he says highlights confidence in the repair cycle.
The other is Carlyle private equity's acquisition - from Dunedin private equity and Rolls-Royce - of Gardner, which makes metallic aerostructure details and other aircraft components.
The Gardner deal was the first for the Carlyle Europe Technology Partners II fund, which closed to new investors last month at €530 million ($688 million).
Gardner chief executive Patrick Grady says: "One third of Gardner's components are used on large civil aircraft platforms and these are relatively protected by sizeable order backlogs." He adds the firm is well-placed in supplying programmes such as the Airbus A380 that are ramping up production rates.
Business development director Nick Guttridge notes customers' desire to work with fewer suppliers and sees Carlyle ownership as a "huge opportunity" for Gardner to take advantage of consolidation and become a bigger player.
As an investor, Carlyle managing director David FitzGerald is not too upset by the current environment. For the past 70 years, he says, the industry has been through four- or five-year cycles. Carlyle's planning puts the next upturn in 2012-13 and recent turmoil does not change that.
What it has done, he says, is lengthen the investment period to four to six years, compared with the two to three years that has prevailed recently. In the Gardner example, he says, Carlyle is looking for opportunities to consolidate its tier 2 position with bolt-on acquisitions, which should be cheaper in a downturn.
But while the mergers and acquisitions environment remains positive for both buyers and sellers, FitzGerald recognises Carlyle's timing as "lucky" in closing CETP II fully subscribed with a "whole plethora of mom-and-pop shops" ripe for deals in line with his strategy of €20-60 million small- and mid-cap buyouts.
Pulling a fund together now would be a different story, he says: "The fundraising environment is challenging."
Source: Flight International
