Industry Week in Review – February 23, 2017
Aerospace & Defense Update
After Retired Vice Admiral Bob Harward turned down President Trump’s offer to be National Security Advisor, the President selected Lieutenant General Herbert Raymond (“H.R.”) McMaster to replace Retired Lieutenant General Michael Flynn. Ret. Lt. General Flynn resigned amid reports he communicated with Russian officials and could be vulnerable to blackmail. Lt. General McMaster has served in the military since 1984 and was most recently the Director of the Army Capabilities Integration Center in Fort Eustis, VA. General McMaster is well known for his book, Dereliction of Duty, in which he criticizes military leadership during the Vietnam era for giving in to powerful civilian officials such as President Johnson and Defense Secretary Robert McNamara. He believes this caused the U.S. to not have a cohesive strategy in the Vietnam War.
This week, Airbus disclosed it is looking to renegotiate government contracts linked to its troubled A400M program, which is billions of euros over budget and years behind schedule. In 2016, €2.2 billion in charges from the program was the main driver for companywide net income falling 63% for the year. Over the last ten years, Airbus has faced ~€7.0 billion in charges in order to correct for unanticipated redesigns and problems with suppliers. Airbus’ woes stem from back in 2003 when the Company agreed to absorb most of the development risk associated with the airplane, which is unusual in military aviation contracts. Currently, Airbus has 174 total orders for the aircraft, but will need to win more orders to make the program profitable.
Government Technology Solutions Update
Secretary of Defense James Mattis recently issued a memo in which he described his desire for a review of some of the Pentagon’s business practices. This was done in order to see if there were any ways in which the Department of Defense (“DoD”) could improve the efficiency with which it conducts business. According to Mattis, some of the initial areas of focus in this review center on, among others, logistics and supply chain management and cyber and information technology management. Some in the industry think that Mattis could potentially use this opportunity to drive innovation in the technical capabilities of the DoD. Mattis’ memo was not entirely comprehensive in terms of exactly what measures will be taken. Until a more thorough review of the Pentagon’s policies is completed, it remains to be seen what initiatives the DoD will take to modernize and improve efficiencies in its IT and cyber infrastructure.
Canada-based MacDonald, Dettwiler and Associates (“MDA”) has agreed to acquire DigitalGlobe, Inc., a provider of Earth-imagery products and services. According to the terms of the deal, the acquisition will consist of $2.4 billion in cash and equity, as well as the assumption of approximately $1.2 billion in net debt, for a total enterprise value of $3.6 billion. This acquisition is part of MDA’s strategy to increase its market share in the United States, and would substantially increase its presence in the Intelligence Community (“IC”). DigitalGlobe’s satellite imaging, satellite constellation, and geospatial analysis offerings provide a variety of intelligence, reconnaissance, and analytics services to the Federal government. Additionally, DigitalGlobe acquired The Radiant Group in October of 2016 for roughly $140 million. That deal provided it with an expanded presence with customers such as the National Reconnaissance Office (“NRO”), the National Geospatial-Intelligence Agency (“NGIA”), the Defense Intelligence Agency (“DIA”), and U.S. Special Operations Command (“SOCOM”). MDA hopes to leverage both DigitalGlobe’s high-end technical capabilities, as well as it’s valuable customer base, as it continues its push to expand further into the American marketplace.
Big Movers
MacDonald, Dettwiler and Associates (down 10.7%) – Share prices down this week after the Company agreed to acquire Digital Globe for $3.6 billion.
Emcor (down 10.9%) – Share prices were down this week after the Company missed 4Q profit forecasts.
Transactions
Aerojet Rocketdyne Holdings, Inc. has agreed to acquire Coleman Aerospace, a provider of suborbital launch vehicles, payloads, and launch services. The deal is worth an estimated $15 million.
BAE Systems, Inc. has acquired IAP Research, Inc., a provider of electromagnetic metal forming technology, magnetic processing of metals and ceramic powders, and electrical and mechanical engineering solutions. Terms of the deal were not disclosed.
Gooch & Housego plc has acquired StingRay Optics, LLC, a provider of high performance optical and opto-mechanical subsystems for demanding defense and commercial applications. The deal is worth an estimated $10 million.
Gowanda Components Group has agreed to acquire Microwave Circuits, a provider of microwave components for commercial and military applications. Terms of the deal were not disclosed.
MacDonald, Dettwiler and Associates Ltd. has agreed to acquire DigitalGlobe, Inc., a provider of high-resolution Earth-imagery products and services sourced from its own advanced satellite constellation and third-party providers. The deal is worth an estimated $3.6 billion.
STG Group Inc. has agreed to acquire Preferred Systems Solutions Inc., a portfolio company of CM Equity Partners, and a provider of information technology, engineering, program management, intelligence, and staffing solutions to Federal government clients. The deal is worth an estimated $119 million.
TransDigm Group, Inc. has acquired Takata Corp., Aerospace Business, a provider of specialty technical restraints covering Airbus and Boeing platforms. The deal is worth an estimated $90 million.
