Industry Week in Review – March 23, 2018
Aerospace & Defense Update
On Friday morning, Congress passed a $1.3 trillion budget deal, which prevents another government shutdown and gives Federal agencies the full government fiscal year spending allotment. The defense bill is touted as the largest increase in defense spending in over 15 years and will increase the budget to $700 billion. The increase is anticipated to add additional funding for ships, aircraft, and missile defense in addition to boosting military readiness and modernization efforts. President Trump raised the possibility of vetoing the spending bill Friday afternoon, but ultimately signed the legislation, referencing that the defense funding within the bill made it too important to veto.
As mandated by the GFY2018 spending bill, the U.S. Army will conduct a competition to procure its Ground Mobility Vehicle (“GMV”), which serves as an ultra-light variant of the Joint Light Tactical Vehicle (“JLTV”). Currently, General Dynamics’s Flyer 72 is serving as the interim GMV and has been purchased for five airborne infantry brigade combat teams. However, a large pool of GMV manufacturers exist, including industry players General Dynamics, Boeing, Polaris, Hendrick Dynamics, Vyper Adamas, and Lockheed Martin. The manufacturers will be competing to provide a total of 1,700 GMVs for this phase of the Army’s procurement process.
Government Technology Solutions
Roughly a month after General Dynamics (“GD”) agreed to acquire CSRA for $40.75 per share in cash, GD sweetened its offer this week to $41.25 per share following a counter bid by CACI. On Sunday, CACI surpassed GD’s original $6.8 billion offer with a $7.2 billion bid of their own, offering $44 per share in cash and stock. However, despite CACI’s increase in valuation, CSRA’s board has accepted the new GD offer, just as they did before the original February 12th announcement when CSRA reportedly also held bids from CACI and SAIC. GD’s valuation represents a $9.7 billion enterprise value as the company will also assume $2.8 billion of CSRA’s debt. GD ultimately prevailed in the bidding war in large part due to their all-cash offer while CACI offered both cash and shares, which closed down 7% Monday after their counter-bid was made public. CACI’s offer was worth just $42.20 per share when the market closed Friday. GD and CSRA received clearance from federal anti-trust officials last week, and the deal is still expected to close in the first half of this year.
The White House released its 2018 President’s Management Agenda on March 20th, highlighting IT modernization, reshaping the federal workforce, and a reorganization of the government. The report highlights 14 priority areas for cross-agency transformation, including improving federal customer experience, category management, transparency for IT spending, acquisition management, and security clearance reform. The three main drivers of this transformation will be IT modernization, data and transparency, and reforms to the federal workforce. Using a combination of executive orders, legislation, and the newly-created central modernization fund established by the Modernizing Government Technology (“MGT”) Act, the agenda emphasizes IT modernization through security improvements, modernizing citizen-facing services, and cost-effective tech infrastructure. Additionally, the agenda takes aim at the federal personnel system, outlining plans to partner with Congress to overhaul the civil service system’s statutory and regulatory rules. Other focus areas for reform include human capital management, cutting unnecessary political positions, and expanding the use of shared services.
Big Movers
CACI International (down 6.8%) – Share prices were down this week after the company made a $7.2 billion bid for CSRA that was ultimately rejected in favor of GD’s all-cash offer.
Smith’s Group (down 6.2%) – Share prices were down this week after the company announced weaker than expected earnings, with revenue falling 4.3% and pretax profit falling 12% for the six months ending January 31.
Transactions
CPI Aerostructures, Inc. has agreed to acquire Air Industries Group’s subsidiary Welding Metallurgy, Inc., a provider of specialty welded products and assemblies, large diameter tube bending and integrated electronic assemblies, among other capabilities, to defense and aerospace markets. The deal is worth an estimated $9 million.
Elbit Systems, Ltd. has agreed to acquire Universal Avionics Systems Corp., a provider of integrated flight management systems and navigation management systems, navigation sensors, flight recorders, and cabin display systems.
Hanover Partners has acquired Blast Deflectors, Inc., a provider of jet blast deflectors, ground run-up enclosures, and end-around taxiway screens for aviation infrastructure applications.
Phoenix East Aviation (Renovus Capital) has acquired Superior Flight School, Inc., a provider of highly engineered aerospace elastomers commercial transport airframes as well as defense aerospace applications. Terms of the deal were not disclosed.
TransDigm Group, Inc. has agreed to acquire Extant Aerospace, a provider of proprietary, aftermarket products as well as repair and overhaul services for aerospace and defense markets. The deal is worth an estimated $525 million.
