September 2010 - Association for Corporate Growth

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Guest Article “ ” hat a difference two years makes in the aerospace sector. Recall the 2008 Farnborough Air show when oil prices were spiking to nearly $150 per barrel and the global financial markets were in the early stages of a massive meltdown. At the time, it was becoming clear that the aerospace up-cycle that was driving strong growth for the supply chain was facing several near-term and potentially longer-term headwinds. In fact, all classes of air traffic experienced a precipitous drop from that point through the end of 2009, causing the airlines to quickly eliminate capacity and severely wound the usually steady aftermarket. Deteriorating credit markets threatened new aircraft purchases and real concerns existed that much of the record Boeing and Airbus backlog would be erased. All of the makings of an abrupt cycle crash were upon us. M&A activity in the sector declined dramatically as a result and a period of great uncertainty engulfed the industry. In reality, the anticipated crash of the commercial aerospace cycle never materialized. Yes, much of the supply chain suffered over the last eighteen months due to new program delays and a significant inventory de-stocking. However, year-over-year deliveries for large commercial aircraft remained at record levels in 2008 and 2009 and are expected to remain at record levels through at least 2014. Boeing and Airbus maintain a substantial backlog of approximately 7,000 aircraft and the risk of cancellations has decreased. From an M&A perspective, this brief sector pause did not create broad distress and therefore well-capitalized buyers did not find the opportunity to pick up assets on the cheap. Sellers remained patient and buyers disciplined, resulting in limited M&A activity. Today, it again feels like the beginning of another aerospace up-cycle. In June 2010, IATA chief executive Giovanni Bisignani noted a “strong rebound of air traffic” and forecast global passenger traffic to grow by 7% in 2010. In addition, IATA expects the global airline industry to return to profitability in 2010, reflecting a remarkable improvement in only a few months. As further evidence of the continued strength in OEM production, Boeing increased both its narrow and wide-body monthly production rates in 2010, including two 737 increases in three months. Fuel prices remain stable, helped by a stronger dollar, albeit at a level that still motivates new, more fuel efficient aircraft and engine purchases. Several new aircraft platforms -- including the 787, 747-8, A350 and C- Series -- are on track to be delivered to customers over the next several years and provide an added boost to long-term industry growth. And after weak orders in 2008 and 2009, new order activity has begun to accelerate over the past few quarters. Boeing reported 100 gross orders in the first quarter of 2010 versus only 28 in the first quarter of 2009. Investors have rewarded the sector for this positive shift in industry fundamentals. Since reaching a low in March 2009, the aerospace index has increased by 120% and Ebitda multiples of publicly-traded suppliers have also increased substantially, resulting in a current median of 9x, representing a nearly 50% increase since March 2009. However, this impressive rebound in aerospace market sentiment has not yet translated into a meaningful up-tick in M&A activity. Indeed, aerospace-related M&A volume will likely begin to accelerate in the second half of 2010 and remain strong for several years. Each wave of aerospace M&A activity has been set in motion by one or more large, high-profile transactions. Several large companies have recently begun to test the M&A market and their outcomes will have meaningful ramifications on buyer and seller sentiment. There will be substantial scarcity value associated with actionable, high-quality 34 MERGERS & ACQUISITIONS September 2010
assets given the lack of recent activity. Strategic buyers have access to substantial cash and probably have a better view of the strengthening market conditions. This, combined with their own improved valuations, is causing them to become more active and aggressive. In addition, several large corporations are reviewing their product portfolios and considering noncore divestitures to take advantage of improved market conditions and re-deploy capital into more strategic products and programs. Of course, financial sponsors are also looking to take advantage of the renewed optimism in the industry. They have access to substantial capital and recognize now as an opportune time to make a bet on the sector. In addition, PE funds own many high quality aerospace companies and are closely monitoring market conditions to monetize assets. These exits will also help to fuel this uptick in M&A activity. Two years have now passed since the aerospace market began its most recent pullback. The rapid industry recovery will likely bring continued positive developments and hopefully the beginning of a healthier aerospace M&A environment to come. Jon Nemo, managing director, heads the Aerospace, Defense & Government Services (ADG) Group at Harris Williams & Co. Jon has 16 years of investment banking experience and has completed over 70 mergers and acquisitions and corporate finance transactions during his career. Harris Williams & Co. (www.harriswilliams.com), a member of The PNC Financial Services Group, Inc. (NYSE:PNC), is the premier middle market advisor with a two decade legacy of sell side excellence serving clients worldwide. The firm is focused exclusively on the middle market providing sell side and acquisition advisory, restructuring advisory, board advisory, private placements and capital markets advisory services. Harris Williams & Co. is the trade name for Harris Williams LLC, a registered broker dealer. Member FINRA and SIPC. September 2010 MERGERS & ACQUISITIONS 35
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September 2010 - Association for Corporate Growth

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