Industry Week in Review – July 6, 2018
Aerospace & Defense Update
On Thursday, Boeing and Embraer announced their agreement to create a joint venture (“JV”) comprising Embraer’s commercial aircraft and services business. Boeing has agreed to pay $3.8 billion for an 80 percent stake, valuing Embraer’s commercial division at $4.8 billion, but the transaction is ultimately dependent on approval from the Brazilian government. While many believe current president Michel Temer will likely approve the deal, he is not running for re-election in October. However, the agreement has been reviewed by the government, and is expected to be approved if the companies also create a military JV independent from the commercial JV. The deal will allow Boeing to better position itself in the market for smaller regional aircraft, particularly important following Airbus’ acquisition of Canada’s C Series program. Following the agreement, Boeing’s commercial aircraft line will range from 70 to 450 seats. The transaction is expected to close in 12 – 18 months, and upon closing, Brazilian management will lead the joint venture.
Japan has chosen Lockheed Martin’s advanced radar for its multibillion dollar missile defense system, according to a defense ministry official. Lockheed Martin’s Long-Range Discrimination Radar was ultimately selected because of its search capabilities and lower lifecycle costs, per the official. In the deal, Japan will buy two Aegis Ashore batteries to be deployed in 2023 as an upgrade to its current missile defense systems designed to counter threats from North Korea and China. While North Korean leader Kim Jong Un has reiterated his vow to denuclearize the Korean peninsula, Japan still sees North Korea as an immediate threat, and China as a long-term threat due to its growing military power. The two Aegis Ashore sites will likely end up costing over twice as much as Japan’s original estimate of $2.0 billion, according to industry sources. The deal will help Japan balance its trade surplus with the U.S., which President Trump has previously urged the country to do through the purchase of U.S. military equipment.
Government Technology Solutions
The Department of Homeland Security (“DHS”) is currently developing a successor contract to its Security Enterprise Acquisition Gateway for Leading-Edge Solutions II (“EAGLE II”) contract, which expires in 2020. The new IT services contract will build upon certain elements from the $1.5 billion Flexible Agile Support for the Homeland (“FLASH”) contract. DHS seeks to include federal category management and “best-in-class” contracting activities in “Flashy Eagle,” the working name for the EAGLE II replacement. Although FLASH was cancelled last year, the vehicle was effective in its agile approach with short offering papers from vendors, technical demonstrations, and selection processes. While FLASH ultimately failed due to its documentation approach reverting to conventional waterfall-contracting methods, supporters were eager to retain the more successful components in a future contract, now coming to fruition under Flashy Eagle.
Deltek recently released its annual Federal IT Market Outlook study, which includes expected trends in the “Addressable IT Market” for government contractors. Deltek is forecasting contractor IT spend to exceed $100.0 billion for the first time in GFY2018 and steadily increase to $116.0 billion by GFY2023. By contrast, last year’s report forecasted more modest growth, with IT spending expected to hit $100 billion in GFY2019 and grow to $105.0 billion by GFY2022. The GFY2018 IT budget of $104.2 billion allocated $51.6 billion, or 50%, to the Department of Defense, $42.8 billion, or 41%, to civilian agencies, and $9.8 billion, or 9%, to the Intelligence Community. Data analytics, cybersecurity, modernization, cloud computing, and IT for veteran care are key drivers of growth in the GFY2018 budget.
KeyW (up 11.1%) – Share prices were up this week after the company announced that it would serve as a subcontractor to Lockheed Martin on a potential $3.53 billion Army contract.
Meggitt (up 10.6%) – Share prices were up this week after the company revised revenue growth guidance upwards.
Boeing Co. has agreed to acquire an 80% stake in Embraer’s Commercial Aircraft and Services Division, a provider of innovative regional jets generally with between 70 and 130 seats. Boeing’s 80% stake is worth an estimated $3.8 billion.
Consolidated Precision Products, a portfolio company of Warburg Pincus, LLC, has agreed to acquire Blue Point Capital Partners’ portfolio company Selmet, Inc., a provider of complex titanium castings and machined components to the aerospace industry. Terms of the deal were not disclosed.
Derichebourg Atis Aerospace has agreed to acquire Ausgael Aviation Services, Inc., a provider of inspection services to airline and leasing companies. Terms of the deal were not disclosed.
Kongsberg Gruppen ASA has agreed to acquire Rolls-Royce Holdings’ Commercial Marine Division, a provider of ship design, deck machinery, propulsion, automation, and control. The deal is worth an estimated $661 million.
L3 Technologies, Inc. has acquired Applied Defense Solutions, a provider of critical support for space exploration for satellite operations, protection, and resiliency. The deal is worth an estimated $50 million.