High production rates will continue to drive further mergers and acquisition activity, according to financial and asset management advisory firm Lazard.
Michael Richter MD Aerospace and Defence Investment Banking Group at Lazard said the number of suppliers in the industry would continue to shrink as businesses struggled to cope with high production levels.
He explained: “There’s a significant amount of production going on within the industry and there are a number of players who are really feeling the heat of such a high production level. We’ve got a lot of ‘Mom and Pop’ operators who just cannot compete from a managerial talent standpoint, from the capital, capital expenditures and they’re really breaking under the pressure.”
“So a lot of these companies are seeking mergers and acquisitions as a way to deal with the pressure of the rate of production that we’re at.”
Fewer number of more qualified suppliers
Richter said the industry would continue to see a high level of consolidation, sales, acquisitions, and merger of equals which, he added would result in a “fewer number of more qualified suppliers.”
He added that mergers and acquisitions were taking place throughout the aerospace supply chain.
M&A taking place “up and down food chain”
“The tip top of the food chain are sensors, UAV and services and cyber security and these are the most interesting companies to a lot of acquirers. There certainly is a tremendous amount of activity there.”
“But it really is up and down the food chain, metals companies, engine machining, aerostructures and then higher end UAVs, sensors and ISR on both the commercial and military sides.”
With OEM share prices on the rise, Richter said competition was driving up valuations within the sector. He explained: “The valuations are really very high. And there’s a lot of factors explaining that, but it has to do with financial sponsors who are really bidding up very high in these auctions and that’s due to a very significant number of dollars chasing acquisitions in our sector.”
“Interest rates are still at a historically low level, our covenants are relatively light, so these sponsors are bidding very aggressively in all these auctions and then strategics come into these auctions and are having to pay more because of the strategic value that they can wring out of these companies.”