Total merger and acquisition value increased in the aerospace and defense sector in the fourth quarter of 2012, following an anemic first nine months of the year, according to Mission Control, a PwC U.S. quarterly analysis of merger and acquisition activity in the global aerospace and defense sector.
Aerospace deals continued to represent the bulk of activity, as defense sector M&A activity remains constrained due to potential sequestration and uncertainty in defense spending. Once this uncertainty lifts in the year ahead, defense M&A should begin to recover as defense companies can better assess transaction opportunities, according to PwC.
We saw a welcome uptick in aerospace and defense M&A activity in the fourth quarter, driven by two mega deals in the commercial aerospace sector, said Scott Thompson, U.S. Aerospace and Defense leader at PwC. Looking ahead, the aerospace sector continues to attract significant M&A interest, with considerable attention focusing on the growth of commercial aviation. Defense sector M&A has remained muted, as investors wait for clarity on the outlook for U.S. defense spending. However, with strong balance sheets and cash positions, and the need to consolidate in a contracting market, we may see some increase in defense industry transactions once uncertainty around the defense budget is resolved.
Total A&D deal value (valued at $50 million or more) reached $8.7 billion in the fourth quarter of 2012, close to doubling from the $4.6 billion in total deal value recorded in the third quarter. This increase in value was primarily driven by two mega deals (valued at $1 billion or more) in the commercial aerospace sector, which accounted for approximately $6.9 billion and 80 percent of total deal value. Deal volume increased slightly during the fourth quarter of 2012 when compared to the third quarter, also driven by aerospace deals.
Looking at the full year of 2012, there were 284 announced deals with disclosed and undisclosed values in the A&D sector representing $19.5 billion in total deal value, down from the record year of 2011 of 320 deals, representing $43.2 billion in total value. Total deal value for 2012 was approximately 13 percent below the preceding 10-year average of $22.4billion. Excluding a mega deal announced in 2012 that was subsequently abandoned, total deal value was $17.7 billion in 2012, or 21 percent below the 10-year average. Overall, the aerospace M&A market had a very strong year, but the defense sector continued to lag.
In 2012, the defense sector faced potential U.S. sequestration and uncertainty, which has continued into early 2013. The defense sector did not generate one mega deal in 2012, while 2011 brought four mega deals. Significant cuts to U.S. defense spending, in the past, have led to waves of defense M&A, signaling potential improvement in deal totals in 2013. Once there is more certainty regarding defense budgets and the impact on specific programs, the defense industry will be able to better value companies and assess M&A opportunities. When this period begins, defense M&A is expected to become much more dynamic, and could lead to some historic deals, according to PwC.
In addition to horizontal consolidation, defense industry sequestration will force continued restructuring, increase the focus on growing exports and increase the likelihood of acquisitions in related services businesses like technology and healthcare. In the near-term until sequestration is decided ñ defense announcements will likely remain limited and focused on bolt-on acquisitions in cyber security, technology solutions and defense electronics,î added PwC’s Thompson.
In 2012 there was a minor shift toward deals involving U.S. parties (when measured on the basis of value) due to participation of U.S. entities in the two mega deals announced during the fourth quarter. This strength was not broad based, and without these two mega deals, average values would have fallen in the fourth quarter. The motivations behind U.S. deal activity during 2012 varied and included the attempted sale of distressed assets, the divestiture of non-core industrial businesses by defense contractors and diversification by defense contractors into higher growth businesses.
On a regional basis, Asia continues to become a more important player in the global aerospace and defense deal market, particularly as an acquirer.
Industrial policies in several of the developed and emerging markets within this region have encouraged the development of larger domestic competitors through local-market consolidation. European players will also likely become more active in the A&D M&A market in 2013. European defense cooperation should remain a motivation for local M&A. However, protectionist sentiments are expected to influence European-related transactions, in light of concerns over domestic employment and the desire to retain the economic benefits of domestic A&D industries.
For a copy of Mission Control, PwC’s quarterly analysis of M&A activity in the global aerospace and defense sector, visit www.pwc.com/us/industrialproducts.