Aerospace & Defense Update
The UK is exploring the option of blocking Melrose Industries’ hostile takeover bid of roughly $9.5 billion for GKN plc, a British manufacturer of aerospace and auto parts. If successful in its takeover attempt, Melrose plans to split up the aerospace and auto manufacturing businesses into separate companies. However, the UK’s defense secretary, Gavin Williamson has expressed serious concerns over the takeover regarding GKN’s defense business as it is a key supplier of components for the Typhoon fast jet and A400M military transport aircraft. There is also the possibility that the defense secretary could block the takeover himself based on national security grounds. On March 6th, management teams from GKN and Melrose are scheduled to appear before the UK’s business committee to discuss the takeover.
Two of SpaceX’s prototype communications satellites were launched into orbit on Thursday, by a Falcon 9 rocket, marking the first time that SpaceX had launched its own satellites. The company’s long-term goal is to launch a constellation of thousands of satellites to beam down internet with the goal of limited service commencing in 2021. SpaceX will also use the launch as an opportunity to test the satellites’ antennas and other systems. The National Space Council held a meeting this week at the Kennedy Space Center and stressed the importance of civil and private industry collaboration to maintain the country’s technological advantage. The council also discussed rolling back some of the antiquated space-related regulations, which could provide a direct boost to private space sector companies such as SpaceX.
Government Technology Solutions
A recent report by BitSight has revealed that a significant number of government contractors have suffered cybersecurity breaches since 2016. Specifically, 4.3% of technology contractors reported at least one breach in this period, ranking in the bottom half of the six contractor industries evaluated for cybersecurity defense. To protect against data breaches, experts suggest implementing more advanced user credentials and patching internal software, as approximately 90% of cyberattacks could be prevented through basic cyber hygiene. As a proactive measure to the growing threat of cyberattacks, government agencies are updating their policies regarding data breach notifications for contractors. The General Services Administration and the Department of Defense have both recently updated their vendor policies to require a tighter timeline for reporting security incidents. Updating defensive cybersecurity technology, along with streamlining reactive protocols, are key areas of focus for the federal government in 2018.
The General Dynamics and CSRA blockbuster $9.6 billion deal showcases the market’s optimism towards future funding and the perceived competitive advantage of scale in government IT services. General Dynamics’ purchase of CSRA will make it the second largest player in the government IT market with a combined $9.9 billion in annual revenue, trailing only Leidos at $10.0 billion. The Trump administration has increased defense funding and prioritized cybersecurity and IT modernization, both core focus areas of CSRA. Since acquiring SRA International and becoming an independent public company in 2015, CSRA’s emphasis in these areas – organically and inorganically – was evident by its acquisition of NES and Praxis in 2017. This transaction reflects the ongoing consolidation in the GovCon space and substantially sized transaction activity, especially amongst the publicly traded companies. This mega deal follows Lockheed’s divestiture of its services business to Leidos and subsequent acquisition of Sikorsky in 2015, and Northrop’s more recent announcement to acquire Orbital ATK. After the CSRA acquisition closes, General Dynamics plans to separate its IT services business into a standalone segment, which will represent approximately 25% of total sales for 2018.
ManTech (up 10.0%) – Share prices were up this week after the company beat consensus earnings per share (“EPS”) estimates and grew revenue by 17% year-over-year.
KBR (down 16.4%) – Share prices were down this week after the company missing consensus EPS estimates and reported a 21% revenue decline year-over-year and also announced plans to acquire SGT.
Behrman Capital has acquired Corfin Industries, LLC, a provider of microelectronics component preparation services for defense, commercial aerospace, space, and healthcare industries. Terms of the deal were not disclosed.
Cubic Corp. has acquired MotionDSP, Inc., a provider of advanced image processing software for public safety, security and government applications. Terms of the deal were not disclosed.
Curtiss-Wright Corp. has agreed to acquire the Dresser-Rand Government Business of Siemens Government Technologies, a provider of mission-critical, high-speed equipment solutions for naval platforms and programs. The deal is worth an estimated $213 million.
KBR, Inc. has agreed to acquire Stinger Ghaffarian Technologies, Inc. (SGT), a provider of technology solutions, engineering services, mission operations, and IT software solutions. The deal is worth an estimated $355 million.
Patriot Defense Group has acquired Innovative Logistics, LLC, a provider of expeditionary logistic services to elements of the U.S. Special Operations Command. Terms of the deal were not disclosed.
TT Electronics plc has agreed to acquire Stadium Group plc, a provider of electronic, interface, and power solutions for the military and commercial sectors, with applications in land vehicles, ship infrastructure, and aviation controls. The deal is worth an estimated $64 million.