KippsDeSanto & Co. Industry Week in Review – November 30, 2018

Summary

A little over a year after its $30.0 billion acquisition of Rockwell Collins, United Technologies Corporation (“UTC”) announced a decision to break itself up to focus on pure, aerospace opportunities.   In other A&D news, German armored vehicles-maker Rheinmetall signaled a potential acquisition of Krauss-Maffei Wegmann (“KMW”) through a joint venture with French tank maker, Nexter.  In the Government Technology Solutions arena, government efficiency remains a top priority as the General Services Administration (“GSA”) consolidates its award schedules in order to make its offerings more accessible and increase competition. Also, Amazon continues to stir headlines with its plans to penetrate the government satellite market through a partnership with Lockheed Martin.

Aerospace & Defense Update

UTC has decided to separate itself into three independent companies, splitting apart one of America’s last industrial conglomerates.  Following the approval of its acquisition of Rockwell Collins, UTC plans to spin off its Otis elevator division and Carrier building systems business.  This separation is expected to be completed by 2020 and leave UTC as a pure-play aerospace company.  UTC believes that being a more focused aerospace company will drive higher valuations as aerospace companies have tended to trade at higher multiples than manufacturing companies.  Surprisingly, shares closed at $122.68 (down 4 percent) following the news.  UTC intends to keep its current CEO and Chairman, Greg Hayes, and he stated that its newly merged aerospace business would have reported about $39 billion in revenue last year.

German armored vehicles-maker Rheinmetall has confirmed initial talks about an acquisition of its rival KMW, a move that would significantly alter the European tank industry.  According to Rheinmetall, a takeover of KMW through a joint venture with French tank maker, Nexter, is on the table.  Coincidentally, Rheinmetall is expected to pitch its design proposal for the pivotal Main Ground Combat system next year, and it will be interesting to see how the dynamic of a KMW acquisition will play into this design proposal.  Rheinmetall’s statement on Monday noted that a final decision regarding the acquisition depends on a “multitude of political, economic and regulatory” aspects.  However, a takeover deal could put to rest the question of what vehicles German defense companies will pitch for multibillion-dollar modernization programs of U.S. ground services.

Government Technology Solutions

 In an effort to improve the efficiency of the federal acquisition process, the General Services Administration (“GSA”) will consolidate 24 award schedules into a single contract vehicle for products and services—reforming the Multiple Award Schedule program.  The initiative seeks to simplify the large and confusing web of contracts currently in place by providing agencies with a single, larger schedule.  Per Federal Acquisition Services Commissioner, Alan Thomas, “a single schedule for products and services will make it easier for customers to find and purchase the solutions they need to meet their respective missions.”  The reform will make offerings more accessible by allowing agencies to focus on acquiring and delivering the right solutions rather than navigating administrative logjams and contracts on multiple schedules.  The intent is that by streamlining acquisition of critical solutions, barriers to entry will be reduced and competition will be increased amongst contractors, providing for more optimized acquisitions for federal agencies. Further consolidation details will be unveiled at GSA’s December 12 industry day at its Washington, DC location.

On Tuesday, AWS hosted its annual re:Invent conference in Las Vegas, where it announced plans to provide antenna services that will allow users to download satellite data.  The new business venture, AWS Ground Station, includes a partnership with Lockheed Martin to access its network of antennas, called “Verge”, and combines it with Amazon’s cloud capabilities.  The partnership will allow AWS to deliver satellite capabilities to government customers, with services ranging from storage and hosting to analytics and data processing.  Additionally, the satellite network is expected to significantly cut costs for customers by providing them with an alternative to building their own ground centers that come with costly infrastructure requirements.  AWS also announced it will build 12 satellite facilities around the world as it attempts to penetrate the growing space-related hardware market and expand their existing cloud services, further affirming their commitment to satellite and space-related services in the government sector.

Big Movers

 Boeing (up 10.3%) – Share prices were up this week after Cowen aerospace analyst, Cai von Rumohr, singled out the Company as the “number one stock pick for 2019.” The analyst confirmed his report stating, “given visibility of a seven-year backlog and still-solid traffic growth, it would take a sharp economic slowdown to disrupt the favorable current production outlook.”

 KeyW Corporation (up 15.9%) – Share prices were up this week following an announcement by the Company on Wednesday that it had received $35.0 million in new awards and additional work to existing contracts for delivery over the next 12 months.

Transactions

Aersale, Inc. has acquired Avborne Accessory Group, Inc., a subsidiary of RBC Bearings, a provider of mid-life aircraft, engines, used serviceable material, and maintenance, repair, and overhaul services.  The deal is worth an estimated $21.5 million.

E3 Federal Solutions has merged with The Sentinel Company, a portfolio company of NewSpring Holdings, creating a provider of mission consulting, information technology, program management, and systems engineering and technical services for the DoD, Intelligence, Homeland / National Security, and other Federal Civilian agencies.  The terms of the transaction were not disclosed.

 Electronic Connector Company of Illinois LLC has acquired the Aerospace and Defense Division of Magellan Distribution, a provider of interconnect and MRO products to top tier U.S. defense contractors.  The terms of the transaction were not disclosed.

EverWatch Corporation, a portfolio company of Enlightenment Capital, has acquired Dynamic Engineering Solutions, a provider of cloud and network administration solutions to intelligence agencies.  The terms of the transaction were not disclosed.

General Dynamics European Land Systems (“GDELS”) has acquired FWW Fahrzeugwerk GmbH, a provider of maintenance and repair of military wheeled and tracked vehicles as well as complex weapon systems for the German Army and other international customers.  The terms of the transaction were not disclosed.

 HEICO Corp. has acquired Apex Microtechnology, Inc., a designer and manufacturer of precision power analog monolithic, hybrid, and open frame components for a wide range of aerospace, defense, industrial, medical, and test applications.  The terms of the transaction were not disclosed.

Kitron has acquired the EMS division of API Technologies Corp., a provider of design engineering and contract electronic manufacturing services for the commercial / industrial, energy, medical, military, and telecommunications markets.  The deal is worth an estimated $15.9 million.

 MTS Systems Corp. has acquired E2M Technologies B.V., a provider of high-quality, durable, electrical-driven motion systems, serving primarily the training sublimation markets.  The deal is worth an estimated $80 million.

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