KAL Capital Naval M&A Focus 2018

Please see our overview of recent M&A and macroeconomic factors influencing the Naval supply chains.

KAL Capital Naval M&A Focus


Report Highlights:

M&A – Supply Chain Spotlight

  • May River Capital continues to build a strong defense focused portfolio of key naval valve and actuation providers
  • ESCO and CurtissWright acquire key sole-source providers in the Naval submarine supply chain
  • Mercury closes two Naval-focused COTS computing deals in less than 6-month period

While funding increases and production ramps, the greater naval supply chain has been
adapting through a series of M&A consolidations to help support the synergies to fully
capitalize on the long-term growth schedules set by current administration and DoD.

Key component and subsystems manufacturers have been a hot target for OEMs and other
private equity-backed businesses building naval-focused portfolios. In 2019 we expect a sharp
increase in new private equity entrants and continued platform growth. This means a more
competitive landscape for these high-value targets in the component supply chains, and
consequently competitive valuations when considering the strategic acquirers are looking for
the same growth opportunities.

Strategic acquirers like ESCO Technologies and established naval-focused platforms like May
River’s Hunt Valve and Precision Tech will be a few of the names to follow as buyer’s seek
invaluable cost and production synergies while the key manufacturers entertain the valuation
spikes and opportunities to integrate into the bigger picture of the production push.

Defense Focus – Naval Budget

  • 5% Real growth over FY’18 with a reverse in 7-year decline in spending
  • First time in over a decade that enacted appropriation will not be operating under continuing resolution
  • All service branches experience double digit YoY growth in budget
  • Naval Procurement funding witnesses an 18% YoY increase to support sizable shipbuilding production growth plans

Shipbuilding Rates – Increasing Production

  • Navy’s FY’19 Production Plan aims to creep closer towards a 355-ship goal
  • Over the next 5-years DDG-51 and SSBN-774s will increase at rates between 2-3 per year
  • Navy’s “NNN” (Navy the Nation Needs) Vision will increase ship platforms to double-digit production rates and rely on heavy supply chain ramping

Focus – Virginia Class

  • Supply chain optimism follows news of steady 2/year production and potential for further increases
  • Funding increases in Virginia AP and PC reflect the continued Block V’s higher cost and priority considering VPM integration
  • Virginia Payload Module to be incorporated onto all Block V submarines moving forward

Focus – Columbia Class

  • One of the top naval and DoD priorities for procurement
  • Funding receives a 3X increase to support design and development of first Columbia Class SSBN-826
  • Forecast plans for Columbia procurement at roughly 1/year from FY’24 to FY’35

Please see the full report for more details

KAL Capital Naval M&A Focus