Paris 2011: Buying Frenzy Here Could Set the Stage for Mergers
Aerospace firms have been doing a roaring trade here at the Paris Air Show, selling record volumes of aircraft, engines and all the associated systems and services that go with them. But, according to leading mergers and acquisitions specialists, they should be just as busy buying and selling each other since the industry recovery now presents the ideal combination of motive and opportunity.
“There is a shortage of available companies [for mergers and acquisitions] even though there has never been a better time to sell,” Paul Edwards, managing director of Jefferies International told AIN just before the Paris show kicked off. “Share prices have returned from the lows of 2009, in fact some have doubled.”
In reality, there was a better time to be a buyer in the recent cycle–namely when the industry was hurting badly in the fall-out from the global financial crisis. Then companies valuations were dipping, but, of course, so too was the availability of capital need to complete the deals.
But couldn’t that mean that the value in M&A activity has swung too far back the other way, with all the bargains buys now gone from the market? The president of one U.S. tier-two company told AIN last month that he wanted to expand through acquisition and has the cash to do so, but now considers the asking prices for his targets to be too high.
Not so, said Michael Richter, managing director of Lazard Aerospace and Defense Group. “There is definitely still value in acquisitions as we are still at the early stages of the next aerospace cycle,” he told AIN. “Companies in the early stage of the cycle generally trade for higher multiples than in the latter stages.”
Data released by Jefferies neatly illustrates the recovery in the aerospace sectors fortunes and why the M&A specialist believes the time is right for sellers and buyers to get connected (see charts).
The charts show that, especially since the last Paris Air Show at the nadir of the recent down cycle, forward-looking EV/EBITDA multiples (enterprise value/earnings before interest, taxes, depreciation and amortization) for those in the civil air transport sector have improved in direct correlation to both the recovery in aircraft orders and deliveries. By contrast, the value multiples for defense companies has dipped in response to concerns about shrinking military spending–especially in key markets like the U.S.
Despite recent uncertainty about profitability in the cost-battered airline sector, Lazard’s Michael Richter said that he remains bullish about the outlook for the aerospace sector. He’s convinced that an upswing is being maintained and that this will drive deal-making forward. “In mergers and acquisitions there will be transformational deals, technology tuck-ins, deals relating to cross-border [market] access, all involving both strategic and financial players [including private equity groups,” he concluded.
At Jefferies, Paul Edwards said that interest in buying aerospace firms is being fanned by the improving profitability across the civil sector’s supply base–further supported by the burgeoning backlogs seen here at Le Bourget this week. “In two years time I expect commercial aerospace M&A will still be pretty good,” he predicted. “But defense M&A could be very difficult.”