Dear Friends,
As we get started in the fall season, the aerospace/defense M&A market remains highly
dynamic with several notable developments. That said, two main topics dominate nearly
every conversation and serve as key drivers of M&A timing decisions.
First, the B737 MAX train wreck continues full steam ahead underscored by multiple
unpleasant developments including Boeing executive departures, Congressional inquiries and
international safety agencies defying the FAA. For us and the aerospace supply-chain, all the
headlines are of limited importance in comparison to the health of the order book. To that
point, Southwest CEO Gary Kelly’s comments gave us the most pause when he announced
that the devoted B737 carrier would be considering diversifying its fleet into other OEMs.
From a M&A perspective, we have been pleasantly surprised by the number of businesses
with significant MAX content that have successfully completed transactions. That said, the
number of deals put on hold or pausing due to MAX uncertainty remains sky high.
Second, now that we are approximately a year out, the US presidential election is becoming a
hot button issue. While we try to stay away from political bias or agenda, the Trump
Administration has been an unequivocal boon to the defense industry with supportive
increases in spending nearly across the board. Businesses with defense-centric end-market
exposures have seen material improvements in valuation multiples over the past three years.
Additionally, the left-leaning rhetoric out of several of the leading Democratic candidates
advocates material changes in the tax treatment of capital gains as well as wealth in general.
Given those two factors, we would expect M&A activity to spike in the event of even the
increased likelihood of a Warren/Sanders nomination. Shareholders of all political
affiliations will be looking to get ahead of any potential tax increases as well as any decreases
in the DoD budget.
Our practice remains very busy with multiple new transactions coming to market before the
end of the year plus a few closed transactions to be (fingers crossed) announced shortly.
As always, we encourage your thoughts and questions and hope to hear from you soon.
Sincerely,
Trevor Bohn Ryan Murphy
Partner Partner
Quarter in Review Q3 2019Introduction
KAL Capital - Aerospace & DefenseQuarter In Review
© KAL Capital, 2018
Table of Contents
I. KAL Capital Overview
II. Q3 M&A Snapshot
III. Commercial Focus
IV. Defense Focus
V. Aftermarket Focus
A&D Sector
Knowledge
Transactions
Relationships
Clients
First
Team
KAL Capital Overview
KAL Capital is a boutique investment bank focused on providing advisory
services to owners of businesses throughout the greater aerospace supply-chains.
Our services consist primarily of M&A advisory and liquidity event planning. Our
clientele are generally family or partnerships that own successful, growing
businesses within the aerospace/defense sector. Today’s M&A environment
offers business owners a wide-range of transaction alternatives, often at
compelling valuations. Our role is to assist in the navigation of this process and to
ensure that valuation is maximized.
▪ KAL is built on the belief that
M&A processes should be built
to maximize transaction
outcomes for clients
▪ KAL has vast experience throughout
the supply chain with a comprehensive
understanding of each subsector’s
growth drivers and strategic buyers
▪ Cross-border transaction experience
▪ KAL has long-term relationships with
financial buyers as well as C-Suite
executives at leading A&D public
companies who prioritize KAL clients
▪ Deep A&D sector knowledge vital to
articulating unique major macro-drivers
▪ KAL team understands that each business
has a highly unique story and accumulation
of history
▪ Founders have worked together for 10+ years
with a combined 25+ years of A&D experience
▪ Deep team of highly-seasoned support staff
Services Provided
• Sell-Side Advisory
• Buy-Side Advisory
• General Strategic Advisory
• Debt Capital Raising
• Equity Capital Raising
• Merchant Banking
M&A Market Snapshot
Q2 Aerospace & Defense M&A Activity
Deals by End Market
❖ Defense-focused
targets have buoyed
2019 deal volume
❖ C4ISR systems,
and aerostructures
& components
manufacturers lead
Q3 M&A priorities
❖ Record-high private
equity dry powder
signals optimism for
2020 deal flow and
valuations
HIGHLIGHTS
Deals by Product Category
Source: DACIS, KAL Capital estimates, and other publicly available information
Strategic vs. Private Equity
Source: DACIS, KAL Capital estimates, and other publicly available information
The DoD spending profile and steady growth in passenger traffic bolster A&D deal flow. Despite geopolitical concerns and broader economic uncertainties, corporate cash and record-high private equity capital tow the deal market forward.
The greater C4ISR systems space contributed greatest in terms of deal count in Q3, as the DoD demands quicker time-to-market solutions for mission-critical systems and blue-chip primes look to streamline supply chains. Mercury Systems has been among the most active buyers in the space, announcing the acquisition of American Panel Corp this quarter and a four-deal total in 2019.
Strong existing cash flows and a favorable lending environment has propelled mega deals and add-ons alike in Q3. Deal counts are slightly lower on a YoY basis, attributed primarily to rising valuations across the A&D market. This quarter we witnessed private equity compete and win against strategic buyers for several key A&D targets and this competitive dynamic will likely continue well into 2020, working in favor for sellers looking for best-price scenarios.
2
2
2
2
4
6
7
8
11
16
19
OEM
Test & Measurement Services
Engineering Services
Naval
Logistics & Distribution Services
ISR Services
Component MRO
Land & Weapons Systems
IT/Cybersecurity
Structural Components/Assemblies
C4ISR & Defense Electronics
32
46
Private Equity
Strategic
19
28
31Gov't Services
Defense
Commercial
$2.2$2.4
CorporateCash
PrivateEquity Dry
Powder
▪ Corporate balance
sheets and private
equity funds primed for
2020 deal flow
▪ Private equity has
reached record-high dry
powder at: $2.4 trillion
Source: KAL Capital estimates, PWC, and other publicly available information
Analysis
HIGHLIGHTS Commercial Focus
Commercial Market Drivers
❖ Strong backlog and
passenger traffic
demand drive
commercial market
❖ Hard/soft metal
machine shops and
composite
manufacturers
display uptick in Q3
deal flow
Strong Supply Chain Backlog
124 434 556
45925706
AllOther
777 787 737 Total
Passenger Traffic Demand
2017 2018 % Δ
Passengers
(millions)965.4 1,011 +4.8
Flights
(millions)9.7 10 +2.6
Rev Passenger
Miles
(billions)1.4 1.5 +5.2
While stagnant trade talks and the 737MAX future
occupy headlines, the health of US commercial
aerospace continues to thrive on supply chain
backlog and passenger traffic growth.
China is expected to acquire ~8,090 new aircraft
over the next 20-years making up the largest growth
market for commercial aviation. Despite trade
conflicts, U.S. manufacturers are destined to play a
significant roll. A bad trade deal would be bad for
Boeing, but worse for COMAC, as most of their
critical systems on their flagship C919 are built by
U.S. suppliers – e.g. GE engines. U.S. suppliers
remain optimistic for the long-term as backlog keeps
the supply chain busy and smooths over current
market volatility.
Overview
Buyer Target Specialization Type
Additive manufacturing and machining PE
CAL-X Sheet metal fabrication and machining PE
Elastomeric seals, gaskets and tooling for composites PE
Hydroforming, roll forming, machining for complex
metal assembliesPE
Specialty forged titanium and high-performance steel
productsPE
Precision thin-walled investment castings Strategic
Expanded and perforated metal foils and polymers Strategic
Composite components for structural assemblies and
enginesStrategic
Beyond the A&D mega-mergers, tier II & III
component suppliers saw an uptick in deals this
quarter. Strategics and private equity are going
head-to-head and driving valuations higher.
Low interest rates and high corporate cash have
raised acquisition appetites, and defense market
exposure serve as common rationale as broader
markets react to a period of instability.
Sources: Boeing, IATA, Other publicly available information
Q3 Components & Structures M&A
Defense Focus – C4ISR & Defense Electronics
Q3 Deal Spotlight
❖ Strategic buyers
lead Q3 acquisition
interest in defense
electronics firms
❖ Strong DoD funding
expectations and
increased
geopolitical risks
drive defense
market growth
❖ Defense electronics
primes and leading
tier II manufacturers
show increased
M&A appetite in Q3
HIGHLIGHTS
dB Control (HEICO Corp.) Acquires TTT-Cubed
TTT-Cubed designs and manufactures RF sources, detectors, and
controllers. TTT will integrate with dB Control as a part of HEICO’s
Electronic Technologies Group
Mercury Systems, Inc. Acquires American Panel Corp
APC engineers and manufactures flat panel displays for AH-64
Apaches, M1A2 Abrams, as well as F-35, F-15, F-16 and F/A-18.
Mercury will integrate APC with their growing avionics platform
Orbit International Corp. Acquires Q-Vio, LLC
Q-Vio provides high-bright, low-power, thermally optimized LED
backlit displays, MIPI board solutions, and ruggedized LCD. Q-Vio
will operate as a subsidiary of Orbit Electronics Group.
Blackhorse Solutions Acquires Amplus Corporation (AMP+)
AMP+ creates digital signal processing algorithms within Software
Defined Radio architectures. AMP+ will integrate with Blackhorse to
serve Cyber Electro Magnetic Activities (CEMA) market.
▪ DoD spending expectations; low single-digit
CAGR
▪ Demand for domestically-produced
technologies
▪ Increasing global security challenges; i.e.
Russia, China, North Korea, and Middle
East instability
▪ FMS / International sales increasing
Defense Industry Drivers
▪ Program and customer expansion
▪ Supply chain delayering – primes
focusing on quality suppliers, tier II & III
incentivized to consolidate
▪ Pre-integrated, open architecture
subsystems
▪ Decreased time-to-market pressure from
DoD
4.3 5.48.4 9.3 11.2
16.2
24.1
36.8▪ 2019 Defense electronics market:
$55Bn
▪ Global A&D electronics market:
$116Bn
PEStrategic
Sources: RSAdvisors, DACIS, Mercury Systems, KAL Capital estimates
M&A Drivers
C4ISR Market ‘19 ($Bn) Active Buyers
Buyer Target
Aftermarket Services Focus
Q3 Aftermarket Deal Count
❖ Private equity
continues to pour
capital into
aftermarket services
❖ Component MRO
businesses buoy at
~9.4x EV / EBITDA
❖ Existing private
equity platform
expansion drives
third quarter
aftermarket deals
HIGHLIGHTS
Q3 Private Equity – All Eyes on the Aftermarket
2
4
7
NDT Test &Measurement
Logistics & Distribution
Component MRO
EV/EBITDA(Avg.)
~9.4x
▪ Component MRO EV/EBITDA multiples have
buoyed at ~9.4x for last two years
▪ Private equity continues to pour capital into
aftermarket, focusing on Part 145 repair stations
▪ PMA certification and DER repair capabilities challenge
high-priced OEM solutions and position key repair
stations as valuable private equity investments
Component MRO
Source: DACIS, KAL Capital estimates, and other publicly available information
Pattonair (Platinum Equity) acquires Wesco Aircraft
Wesco provides distribution and supply chain management services
to the aftermarket. Pattonair will greatly expand its customer base and
global footprint.
StandardAero (Carlyle Group) acquires Safe Aviation
Safe Aviation provides MRO and test services for fuel system
components, aircraft power generation, and actuation systems. The
deal will expand StandardAero’s line replaceable unit capabilities.
PAG (GenNx360 Partners) acquires Momentum Services Corp
MSC provides Part 145 repair specializing in aviation cockpit displays.
PAG will expand their capabilities in LCD cockpit displays,
integrating the business into their Atlanta and Long Beach stations.
AE Industrial Partners acquires Columbia Helicopters
Columbia provides rotorcraft MRO and manufacturing services to
military, firefighting, and oil & gas markets. The business also holds
DoD CARB certification, allowing for military transport services.
Buyer Target
This presentation has been prepared by KAL Capital Markets LLC (“KAL Capital”) for the exclusive use of the party to whom KAL Capital delivers this
presentation (together with its subsidiaries and affiliates, the “Recipient”) using publicly available information. KAL Capital has not independently verified the
information contained herein, nor does Salem make any representation or warranty, either express or implied, as to the accuracy, completeness or reliability of the
information contained in this presentation, or any other information (whether communicated in written or oral form) transmitted to or made available to the
Recipient. Any estimates or projections as to events that may occur in the future (including projections of revenue, expense, net income and stock performance) are
based on publicly available information as of the date of this presentation. There is no guarantee that any of these estimates or projections will be achieved. Actual
results will vary from the projections and such variations may be material. Nothing contained herein is, or shall be relied upon as, a promise or representation as to
the past or future. KAL Capital expressly disclaims any and all liability relating to or resulting from the use of this presentation.
This presentation has been prepared solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related
financial instruments. The Recipient should not construe the contents of this presentation as legal, tax, accounting or investment advice or a recommendation. The
Recipient is urged to consult its own counsel, tax and financial advisors as to legal and related matters concerning any information described herein. This
presentation does not purport to be all-inclusive or to contain all of the information that the Recipient may require. No investment, divestment or other financial
decisions or actions should be based solely on the information in this presentation. The Recipient should not rely on any information contained herein.
This presentation has been prepared on a confidential basis solely for the use and benefit of the Recipient. The Recipient agrees that the information contained
herein and in all related and ancillary documents is not to be used for any other purpose, that such information is of a confidential nature and that Recipient will
treat it in a confidential manner. Distribution of this presentation to any person other than the Recipient and those persons retained to advise the Recipient who
agree to maintain the confidentiality of this material and be bound by the limitations outlined herein, is unauthorized without the prior consent of KAL Capital. This
material must not be copied, reproduced, distributed or passed to others at any time without the prior written consent of KAL Capital.
Trevor Bohn
Partner
(949) 404-4203
Ryan Murphy
Partner
(949) 404-4204
100 West Broadway
Suite 205
Long Beach, CA 90802
www.kalcap.com
P: (949) 404-4201