The Dynamic State of Aerospace and Defense M&A
Given today’s environment, M&A activity in the aerospace and defense industry seems to be evolving on a daily basis. Since we last released our Quarterly Industry Review (March 2020), there has been a substantial improvement in key underlying metrics that drive A&D industry growth.
Sentiment in commercial aerospace bottomed sometime in April and has seen consistent improvement since. There has been a range of positive news, but the major US airlines announcing improving demand trends and even increased flight activity is probably the most important. American Airlines announced a July schedule that was 55% of 2020 which marked a material increase from May which was ~20% of 2020 levels. This announcement was followed by directionally similar announcements from other carriers and led to a profound rally in equity prices throughout the sector. For aerospace M&A, the recovery of air traffic is a critical leading indicator for both the aftermarket as well as the OEM build-cycle. This shift has already improved our conversations with many strategic and private equity buyers as many of the “doomsday” scenarios that had become prevalent now seem to be highly unlikely. Additionally, the gradual restart of the B737MAX production line has been an invaluable lifeline to many supply-chain participants. We are hopeful that a 2020 announcement of the B737MAX return to service will be one more piece of good news that continues us on our positive trajectory.
For the defense sector, our thesis from our Q1 newsletter that businesses with exposure to defense end-markets will continue to be in high-demand has borne itself out. We are in the market with several defense-focused transactions that have seen strong interest from buyers of all types. Admittedly, there has been essentially zero announced transactions in the last 90 days, but we anticipate closing transactions this month and the launch of several new deals. We feel that Q3 will mark a return to some level of transaction activity and by Q4 we will be seeing transaction announcements at a tempo that feels more normal.
Here is a rough summation of the some of the industry trends we’re witnessing right now:
- Over the immediate term, the sector will likely continue focusing on the defense industry, though commercial aerospace has bottomed and shown improvement
- Megamergers will become rarer, but purchases of smaller targets will likely accelerate.
- The focus in M&A will be on accessing new technologies, gaining new capacities, and geographic reach expansion.
- Consolidation has produced several major industry players who will continue to choose a highly aggressive M&A strategy for expansion.
- Investment in emergent technologies has added new competition from previously unrelated industries, including software.
About KAL Capital Markets:
KAL Capital Markets is an aerospace investment banking company advising middle market clients on mergers, acquisitions, and accessing the capital markets. The firm’s professionals have an exceptional track record, rooted in deep relationships and experience within aerospace & defense manufacturing and aftermarket services sectors. For additional information, please visit https://kalcapital.wpengine.com/.