UTX-Goodrich Deal Pushes Aerospace M&A Activity to Record Levels in 2011

M&A activity in aerospace and defense could hit another all-time high in 2012, PwC says.

United Technologies Corp.'s $16 billion acquisition of Goodrich Corp. pushed M&A activity in the aerospace and defense sector to an all-time high in 2011, according to data from PwC.

The 341 mergers and acquisitions announced in 2011 -- totaling $43.7 billion in value -- eclipsed the previous highs of 332 deals in 2010 and $42 billion in deal value in 2007, according to PwC's Aerospace and Defense practice.

While UTX's acquisition of Goodrich -- expected to close midyear -- was the primary driver of the record dollar figure, the driver for the record M&A volume was "more broad-based," according to PwC, which saw higher numbers of deals worth less than $50 million and mega deals worth more than $1 billion.

"Although mega deals were not as common in 2011 as they were in 2007, these transactions have continued their recovery from the recent low of only two such announcements in 2009 up to six in 2011," PwC explains in its most recent "Mission Control" report, which analyzes M&A activity in the aerospace and defense sector.

"This led to an increase in average deal sizes, even when removing the impact of the Goodrich deal."

Defense Divestitures Boost Deal Volume

Divestiture of slower-growth defense businesses and private-equity exits dominate the list of 2011's largest deals, according to PwC.

Two headline divestitures -- the Northrop Grumman shipbuilding spin-off and the break-up of ITT -- ranked among the top five deals this year. In addition, four of the top 10 deals were sales by private-equity companies to strategic investors.

On the buy side, only one private-equity purchase made the list: the Providence Equity Partners acquisition of SRA International.

The biggest deal of 2011 by far -- the United Technologies acquisition of Goodrich -- "allows United Technologies to diversify more into the commercial aerospace sector through products such as nacelle systems and landing gear," according to PwC.

"In addition, Goodrich has exposure to several defense categories with a favorable outlook, including intelligence, surveillance and reconnaissance (ISR)," PwC explains in the report.

The next-largest announcement was the Engine Holding GmbH joint venture between Daimler and Rolls-Royce Group for Tognum AG, the second-largest global manufacturer of high-speed engines for marine, energy and defense industries.

The deal is expected to help the acquirers increase their exposure to lighter engines, including those in Tognum's marine unit, PwC points out. Engine Holding has received all regulatory approval required for the merger.

The top 10 aerospace and defense deals in 2011, according to PwC, were:

  1. Goodrich Corp.-United Technologies Corp. (United States-United States) -- $16.18 billion
  2. Tognum AG/Engine Holding GmbH (Germany-Germany/U.K.) -- $4.72 billion
  3. ITT Exelis-Shareholders (United States-United States) -- $2.10 billion
  4. Huntington Ingalls Industries Inc.-Shareholders (United States-United States) -- $2.01 billion
  5. SRA International Inc.-Providence Equity Partners LLC (United States-United States) -- $1.79 billion
  6. IAE International Aero Engines AG-United Technologies (United States-United States) -- $1.50 billion
  7. Vizada SAS-Astrium SAS (France-France) -- $960 million
  8. Vangent Holding Corp.-General Dynamics Corp. (United States-United States) -- $960 million
  9. Primus International Inc.-Precision Castparts Corp. (United States/United States) -- $900 million
  10. Souriau Holding SAS-Esterline Technologies Corp. (France-United States) -- $700 million
Will 2012 Be Another Record Year for Deals?

With OEMs experiencing large order backlogs, aerospace deals likely will continue to lead the aerospace and defense deal market in 2012, PwC says.

The outlook for defense M&A activity is less certain.

"Defense M&A will likely remain oriented toward large spin-offs of lower-growth units and smaller acquisitions in growth areas, such as cyber security," PwC explains.

"However, the further defense budgets fall, the more likely there could be calls for larger-scale consolidation, which could outweigh antitrust concerns, in order to maintain a strong defense industrial base."

Overall, M&A activity in aerospace and defense could hit another all-time high in 2012.

"Strategic investors have significant cash positions and appear well-positioned to drive a high volume of deals in 2012, both large and small," PwC says in the report. "Deal volume, if not deal value, could be set to break another new record in 2012."

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