Air, Land, Sea, & Space Systems M&A Update – December 2024

Air, Land, Sea, & Space Systems M&A Remains Strong, Elevated Contracting Efficiency Needed

The Air, Land, Sea, & Space (ALSS) Systems sector has charted a strong course in 2024, with year to date (YTD) mergers and acquisitions (M&A) outpacing total year deal volume in each of the past five years outside of the historic high of 2023. Funding levels for government contractors in the sector, initially capped at a 1% year-over-year (YOY) increase due to the Fiscal Responsibility Act of 2023, have been supplemented by military aid packages for Israel, Ukraine, and Taiwan. In total, the budget for U.S. defense in fiscal year (FY) 2024 surpassed $900 billion due to the supplemental funding, which totaled $95.3 billion, according to the House Appropriations Committee.¹ On the commercial side of the sector, an unfavorable year for Boeing (NYSE:BA) has reduced its overall commercial airplane production. An entire overhaul of the company’s senior management, coupled with persistent labor challenges, have driven Boeing’s production rate for 737 MAXs between 10% and 20% below the rate of production allowed by federal regulators, according to Flight Plan.² The drop in commercial airplane production has prompted the prolonged use of existing aircrafts, driving considerable demand for maintenance, repair, and overhaul (MRO) providers. In turn, the Air Systems segment has continued to dominate M&A volume through YTD. However, across the sector’s four main segments, the Space Systems segment has generated the most optimism for future M&A growth. The Space Systems segment’s fragmented landscape of contract-dependent start-ups has made it a key area for continued consolidation through 2024 and into 2025.

U.S. Government and the private sector continue to invest in Air / Land / Sea / Space (ALSS) systems, with new space still a fragmented and M&A-target rich subsector. Defense and space prime contractors are actively seeking to shore up key suppliers to ensure surety of supply for critical subsystems.

Tess OxenstiernaManaging Director, Head of ADGS Investment Banking, Capstone Partners

Inefficient Contract Processes Hamper Revenue Growth, Provide Opportunities for Air, Land, Sea, & Space Systems M&A

The Space Systems segment of the ALSS Systems sector has remained fragmented in comparison to the Air, Land, and Sea Systems segments, allowing for potential consolidation growth. Start-up companies focused on the Space Systems segment have proliferated since the founding of the Space Force in 2019 as an independent branch of the U.S. military. As a result, many businesses within the Space segment have become completely reliant on a consistent flow of government contracts to maintain solvency. Major challenges to this ecosystem have arisen, especially the pace of government budgeting and contracting processes. Given the nascency of many segment players, Requests for Information (RFIs), fact finding processes which asses the capabilities of a potential government supplier, have been mistakenly interpreted as signs of immediate contract opportunities. In reality, contract processes can take years to complete, while the heavy consolidation of component manufacturers has caused shortages, only adding to the lag time. Solutions to this challenge will likely involve increased communication and partnership between segment players and the multiple space-related agencies across the U.S. government.

Select U.S. government agencies have increased space-related funding programs to mitigate manufacturing constraints. Notably, the U.S. Department of Defense (DOD) recently expanded the funding ceiling for the Proliferated Low Earth Orbit (PLEO) Satellite-Based Services program, a high-speed internet satellite constellation. The announcement raised the projected spending on the program from $900 million to $13 billion, according to an article from SpaceNews.³ So far, the program has selected 20 new vendors to compete for task orders over a five-year base period, with SpaceX receiving the majority of the original funding allocated to the project. The contract also follows a market-based model which allows for subcontractors to “self-identify the most cost-effective ways of delivering capabilities,” according to Kevin Seybert, a SpaceX executive featured in the article. In addition to dramatically increasing funding for existing space projects, the Space Force has reiterated its support for a Commercial Augmentation Space Reserve (CASR). This program is designed to boost the Space Force’s capabilities during times of crisis by partnering with private companies for access to their satellite communications infrastructure. The CASR is modeled after the Air Force’s Civil Reserve Air Fleet (CRAF), which partners with commercial airlines to supplement additional aircraft to the military during national emergencies. While the Space Force cannot afford to continuously rent a reserve of satellite infrastructure from commercial providers, the program is expected to incentivize closer partnership and collaboration between segment players and the military.

Prime Contractors Active in the Space Systems Segment Report Considerable Organic Growth

Positive operating performance among public players’ Space Systems business units, coupled with healthy Equity market returns, have fueled confidence in future M&A. Notably, public company buyers have comprised the highest percentage of total M&A transactions in the sector through YTD. For large strategics with multiple business segments, acquisition targets that can fill gaps along the supply chain and expand margins have been highly sought after. This strategy was recently voiced by Peter Beck, RocketLab (Nasdaq:RKLB) Founder and CEO, in the company’s Q2 2024 earnings call: “Increasingly, they [launch companies] want complete mission solutions and a mixed approach of organic and development in M&A. The focus is on targets that would fill gaps in our already extensive suite of solutions, while also enabling meaningful revenue scale and profit.”⁴

The Space Systems segment has shown to be lucrative for leading prime contractors, despite the increased competition from start-ups and sponsor-backed companies. This is likely due to the decades of experience with government contracting processes and direct access to component manufacturers which have supported a competitive edge for prime contractors in a growing market. Of note, Lockheed Martin’s (NYSE:LMT) Space business unit, the main provider of satellites for the Space Development Agency’s Transport Layer Tranche 2, reported a 5% YOY improvement in operating profit during Q3, a non-generally accepted accounting principle (GAAP) measurement of overall profitability, according to its Q3 2024 earnings report.⁵ Northrop Grumman’s (NYSE:NOC) Space Systems business unit saw similar results in Q3, reporting a 16% YOY increase in YTD operating income to $979 million, according to the company’s Q3 2024 earnings report.⁶ Additionally, L3Harris Technologies (NYSE:LHX), an active acquirer in the segment, reported a 10.8% YOY improvement in its Space and Airborne Systems segment’s YTD Q3 operating income, totaling $626 million, according to its Q3 2024 earnings report.⁷ Collectively, publicly traded contractors focusing on the Space Systems segment have seen substantial Equity market performance growth over the past year. Capstone’s Space Systems public company index outperformed the S&P 500 on an EBITDA multiple basis by more than eight turns, reaching 25.7x on October 31, 2024. Healthy Equity market returns may galvanize key decision makers at large public strategics in the sector to continue pursuing M&A.

Air, Land, Sea, & Space Systems M&A Activity Drops Slightly Year-Over-Year Following Year of Record Volume

Transaction activity in the ALSS Systems sector has fallen 4.3% YOY to 89 transactions announced or completed YTD. Following full-year 2023, which saw a record for transaction activity in the sector (116 deals), YTD volume has maintained a similar pace and is expected to outperform deal activity from full-year 2021. Public companies have comprised the lion’s share (41.6%) of total transactions YTD, a trend that has not been seen since 2019. Private equity (PE) activity in the sector has declined to date as sponsors have struggled to finance acquisitions amid an elevated interest rate environment. Add-on acquisitions comprised 25.8% of all transactions in YTD 2023, but this figure dropped to only 12.4% in YTD 2024. This decline in add-ons has lifted the share of strategic buyer activity to 75.3% of all transactions, the first time strategics have totaled more than 70% since 2020. The total enterprise value of disclosed acquisitions through YTD has significantly outpaced the prior year period, bolstered by six acquisitions that reached at least $1 billion in enterprise value. Though transaction volume in the ALSS Systems sector has dipped YTD, high-value deals and strategic acquisitions targeted at meeting the evolving needs of modern defense have continued to drive strong activity. A recent deal exemplifying this trend was AeroVironment’s (Nasdaq:AVAV) November announcement to acquire BlueHalo for ~$4.1 billion. BlueHalo, a portfolio company of Arlington Capital Partners, was founded in 2019 and has quickly become an innovative leader, with capabilities across Space, Counter-Unmanned Aircraft Systems (C-UAS) & Autonomous Systems, Electronic Warfare & Cyber, Unmanned Maritime, and Artificial Intelligence (AI) & Machine Learning (ML). BlueHalo’s 10 flagship solution families and 100+ patents will complement AeroVironment’s offerings around Uncrewed Systems, Loitering Munitions, and Advanced Technologies to create an all-domain leader in defense technology. The newly combined company will benefit from cost cutting synergies and is expected to achieve ~$1.7 billion in annual revenue on a pro forma basis, according to BlueHalo’s press release.⁸ Strategics are expected to continue to drive dealmaking activity in 2025, however, PE firms in the broader M&A market are showing signs of a return to activity and the ALSS Systems sector will no doubt see increased competition from this re-emerging buyer pool.

Large Primes Acquire Key Suppliers to Shore Up Supply Chains

Leading players across the sector have increasingly acquired their main suppliers to shore up supply chains and prompt efficiencies of scale through vertical integration. To date, the two largest examples of this trend have been Lockheed Martin’s acquisition of Terran Orbital (August, $247.1 million, 1.9x EV/Revenue) and Boeing’s acquisition of Spirit AeroSystems (NYSE:SPR) (July, $8.4 billion, 1.3x EV/Revenue). Key details of these acquisitions are highlighted below.

• Lockheed Martin Acquires Terran Orbital (August 2024, $247.1 Million, 1.9x EV/Revenue) – Lockheed Martin acquired Terran Orbital in August for an enterprise value of $247.1 million, equivalent to 1.9x EV/Revenue. Terran Orbital is a global provider of satellite solutions for the Aerospace and Defense end markets and was the leading small satellite and cube satellite supplier for Lockheed prior to the acquisition. The relationship between the two companies dates back to 2017 when Lockheed Martin Ventures provided Terran Orbital with a capital injection of $7 million during June of that same year. In the time between then and the acquisition in 2024, Lockheed Martin Ventures completed five additional fundraising rounds for the company. Lockheed had been purchasing small and cube satellites from Terran Orbital for the Space Development Agency’s (SDA) Transport Layer Tranche 2. When Terran missed its earnings projection due to a shortage of free cash flow, Lockheed decided to acquire the company to solidify its supply of satellites moving forward. “We’ve worked with Terran Orbital for more than seven years on a variety of successful missions. Their capabilities, talent, and business momentum align with Lockheed Martin Space’s strategic plans. Our customers require advanced technology and even faster product development, and that’s what we can achieve together,” said Robert Lightfoot, President of Lockheed Martin Space, in a transaction press release.⁹
• Boeing Announces Acquisition of Spirit AeroSystems (July 2024, $8.4 Billion, 1.3x EV/Revenue) – Boeing announced its acquisition of Spirit AeroSystems in July for an enterprise value $8.4 billion, equivalent to 1.3x EV/Revenue. In the midst of a tumultuous year for Boeing, the company has taken major steps to regain the trust of its main customers, including major commercial airlines and the U.S. government. One of these steps included the re-acquisition of Spirit AeroSystems, a manufacturer of aircraft structures and components and Boeing’s top supplier. In February 2005, Boeing spun-off its subsidiary, Mid-Western Aircraft Systems, in a deal worth $1.2 billion in enterprise value. Mid-Western Aircraft Systems later became Spirit AeroSystems, and the transaction allowed Boeing to improve its gross margins by outsourcing the production of aircraft parts to Spirit instead of producing them in-house. In an effort to regain the trust of key customers, Boeing re-acquired Spirit to put an emphasis on quality control over margins. “We believe this deal is in the best interest of the flying public, our airline customers, and the employees of Spirit and Boeing, our shareholders, and the country more broadly. By reintegrating Spirit, we can fully align our commercial production systems, including our Safety and Quality Management Systems, and our workforce to the same priorities, incentives, and outcomes—centered on safety and quality,” said Dave Calhoun, former President and CEO of Boeing, in a press release.¹⁰

ALSS Systems M&A has continued on a positive path following a record year for transaction activity in 2023. Sector dealmaking has been driven by large strategic transactions seeking to transform supply chains and an active pool of public company buyers targeting businesses in the Space Systems segment. Through year-end and into 2025, more efficient contract processes and greater collaboration between commercial players and the military will allow for consistent revenue performance and heightened acquisition availability. Capstone anticipates the ALSS Systems M&A to continue its positive momentum moving into next year.

To discuss need for increased contracting efficiency, provide an update on your business, or learn about Capstone's wide range of advisory services and Air, Land, Sea, & Space Systems M&A knowledge, please contact us.

Endnotes

1. House Appropriations Committee, “House Passes Series of Security Supplemental Bills,” https://appropriations.house.gov/news/press-releases/house-passes-series-security-supplemental-bills, accessed October 31, 2024.

2. Flight Plan, “Airbus and Boeing Report July 2024 Commercial Aircraft Orders and Deliveries,” https://flightplan.forecastinternational.com/2024/08/19/airbus-and-boeing-report-july-2024-commercial-aircraft-orders-and-deliveries/, accessed October 31, 2024.

3. SpaceNews, “Pentagon’s commercial satellite internet services program soars to $13 billion,” https://spacenews.com/pentagons-commercial-satellite-internet-services-program-soars-to-13-billion/, accessed October 31, 2024.

4. Rocket Lab, “Rocket Lab Investor Relations,” https://investors.rocketlabusa.com/events-and-presentations/events/default.aspx, accessed October 31, 2024. 3

5. Lockheed Martin, “Lockheed Martin Q3 2024 Earnings Report,” https://investors.lockheedmartin.com/static-files/cceaf6a7-182d-4ecd-9d69-6f178929e459, accessed October 31, 2024.

6. Northrop Grumman, “Northrop Grumman Q3 2024 10-Q,” https://investor.northropgrumman.com/static-files/9bbf5fd9-bed7-4739-a769-a639af3b5ea9, accessed October 31, 2024.

7. L3Harris Technologies, “L3Harris Technologies Q3 2024 10-Q,” https://l3harristechnologiesinc.gcs-web.com/static-files/8306d1e3-e56e-4129-98d0-597723d1ed7e, accessed October 31, 2024.

8. BlueHalo, “AeroVironment to Acquire BlueHalo Establishing Next-Generation Defense Technology Company,” https://bluehalo.com/aerovironment-to-acquire-bluehalo/, accessed December 2, 2024.

9. Lockheed Martin, “Lockheed Martin to Acquire Terran Orbital,” https://news.lockheedmartin.com/2024-08-15-Lockheed-Martin-to-Acquire-Terran-Orbital, accessed October 31, 2024.

10. Boeing, “Boeing to Acquire Spirit AeroSystems,” https://investors.boeing.com/investors/news/press-release-details/2024/Boeing-to-Acquire-Spirit-AeroSystems/default.aspx, accessed October 31, 2024.