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

Segment Tailwinds Bolster Air, Land, Sea, & Space Systems M&A

Continued consolidation in the Air, Land, Sea, & Space (ALSS) Systems merger and acquisition (M&A) market has been driven by favorable operating conditions for sector participants. M&A transactions in the sector increased by 52.6% year-over-year (YOY) in 2023 compared to a broader M&A decline of 22.6% YOY across the U.S., Canada, and Europe over the same period. New contract opportunities and elevated travel demand have helped to drive growth, which has attracted sponsors to the sector in spite of the slowdown of private equity activity across the broader market. Notably, buyers in Air and Space accounted for 75.3% of deals through full year 2023, with these subsegments experiencing favorable tailwinds despite the challenging economic environment. While inflation remains high at 3.5% (U.S. Bureau of Economic Analysis¹), leading strategic buyers in the sector have been able to fight inflationary pressures and improve gross margins to maintain profitability. Notably, Hexcel (NYSE:HXL), a manufacturer of composite structures for Commercial Aerospace and Space end markets, reported a 230 basis point YOY gross margin improvement through Q3 2023 due to higher sales volume leverage, according to an earnings release.² Additionally, unmanned aircraft developer AeroVironment (Nasdaq:AVAV), improved its gross margin YOY by a massive 1,900 basis points, according to its fiscal Q2 2024 earnings release.³ While inflation appears to be headed in a positive direction, strategic buyers are projected to continue their robust M&A activity into 2024 to enhance their market positions in growth segments.

This particular segment of the Aerospace and Defense market – Air, Land, Sea, & Space Systems – continues to be propelled by government and commercial spending in the Space domain, as underscored by the 53% year-over-year increase in M&A transactions.

Tess OxenstiernaManaging Director, Capstone Partners

Tailwinds Drive Sustained Growth in Key Segments

Within the global Space Systems market, a supply and demand imbalance has created opportunities for expansion into new geographical regions. Specifically, the war on Ukraine has driven companies and investments connected to Russia out of the market, leaving Europe with its lowest satellite launch rate in 40 years in 2023, according to an article in Aviation Week.⁴ “A lot of people are just beginning to grasp that in the last 12 months, the global Launch industry has turned completely upside down. We are, for the first time in the history of launch, in a situation where there is scarcity,” said Tory Bruno, CEO of United Launch Alliance, a joint subsidiary of Lockheed Martin (NYSE:LMT) and Boeing (NYSE:BA), in the article. In response, commercial space companies in the U.S. have increasingly been contracted to fill the void and provide launch capabilities internationally. Of note, the European Union (EU) awarded a $192 million contract to SpaceX to launch two satellites in support of the European Space Agency’s (ESA) Galileo constellation, according to a press release.⁵ This deal marks a continuation of the ESA’s partnership with SpaceX, which has also been contracted to handle the launch of the ESA’s Euclid astronomy mission and the Hera asteroid mission. Heightened private sector investment into the U.S’ domestic Space industry has built a strong base of well-capitalized companies with a proven track record of successful launches. Notably, U.S. private sector investment amounted to $135.9 billion from 2014 through Q3 2023, outpacing China’s spending of $79.4 billion, according to Space Capital.⁶ In Q3 alone, U.S. private sector investment grew 11.8% YOY to $1.9 billion.

Supported by robust travel demand, players in the Air Systems segment have experienced healthy YOY revenue growth. Boeing, one of the largest manufacturers of commercial airplanes, reported a 13% YOY increase in revenue driven by a higher volume of commercial airplane deliveries, according to its Q3 2023 earnings transcript.⁷ The company has a backlog of 5,100 airplanes valued at $392 billion, highlighting persistent demand for commercial planes. Growing U.S. airline traffic is expected to sustain the demand for commercial manufacturers, as U.S. passenger enplanements for domestic and international flights rose 8.4% YOY in August 2023, according to the U.S. Bureau of Transportation Statistics.⁸ Additionally, the resolution of labor negotiations between commercial airlines and pilots is also expected to help maintain the growing rate of airline traffic by preventing widespread delays. Pilots represented by the Air Line Pilots Association agreed to a contract with United Airlines (Nasdaq:UAL) in September that is expected to raise wages by up to 40%, according to a press release.⁹ This followed a similar contract agreement in August 2023 between pilots represented by the Allied Pilots Association and American Airlines (Nadaq:AAL), which gave pilots an immediate 21% pay raise, according to a press release.¹⁰ The new contracts have averted work stoppages and the disruption of U.S. commercial air travel, bolstering demand for sector players in the near-term. In relation to the Defense end market, ongoing geopolitical conflicts involving U.S. allies are projected to boost federal spending on military air systems.

Air, Land, Sea, & Space Systems M&A Outperforms Historical Precedent

Transaction activity in the ALSS Systems M&A market surged with 116 transactions announced or completed in 2023, a 52.6% increase compared to full year 2022. Strategic buyers captured the majority of transactions in 2023, while financial buyers continued to pursue add-on acquisitions (23.3% of transactions) rather than leveraged buyouts amid a costly debt environment.

Public strategic buyers slightly reduced their share of total transactions from 34.2% in 2022 to 32.8% in 2023. L3Harris (NYSE:LHX), a leading buyer in the Space Systems segment, adjusted its acquisition thesis in 2023 to become more selective and shed non-aligned assets. “We’re taking a portfolio approach. We’re looking to acquire businesses that are aligning with our nation’s defense strategy and in growing markets. And then we’re divesting those businesses that don’t necessarily align with our strategy,” said L3Harris CEO, Chris Kubasik, in an earnings call.¹¹ Despite a pullback in YOY M&A volume, public company buyers have driven the majority of disclosed deal value. Public strategics allocated a combined $11 billion in disclosed enterprise value for acquisitions, accounting for 79.7% of total disclosed enterprise value in 2023.

Air and Space Systems M&A Highlights Key Trends in the ALSS Systems Sector

The Air Systems segment led sector deal activity, accounting for 47.9% of total transactions in 2023, a 14.1% increase compared to 2022. In particular, manufacturers of composite aerostructures and components have experienced significant acquirer interest. Kratos Defense’s (Nasdaq:KTOS) acquisition of composite aircraft manufacturer Sierra Technical Services (October, $27.3 million) and Chargers Investment Partners’ acquisition of Unitech Aerospace (November, undisclosed) have showcased the buyer appetite for composite manufacturing capabilities. “With the additional resources and capabilities of Unitech, APEX is incredibly well positioned to support the growth of its blue-chip customer base. APEX will continue to benefit from tailwinds in the Composites industry,” said Aaron Perlmutter, co-Founder and Partner at Charger Investments, in a press release.¹²

M&A volume in the Space Systems segment through 2023 outpaced full year 2022 with 40 transactions announced or completed, compared to 37 during the prior year period. Buyers targeted commercial space companies with diversified offerings operating in Defense and Civilian end markets. Inorganic growth has proven to be a successful strategy for legacy defense companies looking to gain significant market share, evidenced by L3Harris’ acquisition of rocket engine supplier Aerojet Rocketdyne (December 2022, $4.8 billion). BAE Systems’ (LSE:BA) acquisition of Ball Aerospace in August for an enterprise value of $5.5 billion, equivalent to 2.8x EV/Revenue, has also demonstrated the heightened buyer interest for segment players. Ball’s space related offerings are forecasted to account for approximately 70% of its full year 2023 estimated revenue of $2.2 billion, according to a press release.¹³ The acquisition is expected to provide a platform to accelerate BAE’s space systems strategy. “This marquee acquisition would advance our company’s position in some of the fastest growing segments of the Defense market and further increase our alignment with enduring customer priorities in both the U.S. National Defense Strategy and U.S. Intelligence Strategy,” said Tom Arseneault, President and CEO of BAE, in the press release.

AE Industrial Partners Continues to Lead Sector Consolidation Among Financial Buyers

Florida-based private equity firm, AE Industrial Partners (AEI), has become a leading acquirer in the ALSS Systems sector. In June 2023 alone, the firm completed four transactions in the sector either through direct acquisitions or through its portfolio companies, accounting for 10% of total financial buyer activity through 2023. York Space Systems, AEI’s flagship portfolio company in the Space Systems and Small Satellite (SmallSat) segments, was awarded a $615 million contract by the U.S. Space Development Agency (SDA) in October 2023 to produce 62 satellites for the Department of Defense’s (DOD) LEO constellation, according to a press release.¹⁴ AEI’s investment in the company has led York to become the SDA’s largest supplier of satellites, according to the press release. Select AEI transactions in the ALSS Systems sector through YTD are highlighted below.

• AE Industrial Partners-backed Firefly Aerospace Acquires Spaceflight (June 2023, Undisclosed) – Firefly Aerospace, a portfolio company of AEI, acquired Washington-based Spaceflight in June for an undisclosed sum. Spaceflight provides launch and in-flight transportation services for satellites, as well as sub-systems, avionics, torque rods, star trackers, solar panels, batteries, and dispensers. Firefly manufactures launch and spacecraft vehicles, offering LEO launch solutions for up to four metric tons of payload. This is Firefly’s first transaction following its acquisition by AEI in February 2022 for an undisclosed sum. Spaceflight has previously partnered with a wide array of launch providers, but the company’s services are expected to be used exclusively on Firefly’s vehicles going forward, according to a press release.¹⁵ “Firefly will honor Spaceflight’s current contracts but will not be aggregating payloads on other launch vehicles moving forward,” said Firefly spokesperson, Risa Schnautz, in the press release.
• AE Industrial Partners-backed Firefly Aerospace Acquires the Remaining Assets of Virgin Orbit (June 2023, $3.8 Million) – AEI-backed Firefly Aerospace acquired the remaining assets of Virgin Orbit during the company’s Chapter 11 bankruptcy proceedings. The acquired assets have been identified as the inventory at Virgin Orbit’s two facilities in Long Beach, California, including engines and components built for Virgin’s LauncherOne vehicles. Virgin Orbit filed for Chapter 11 bankruptcy in April 2023 after failing to secure financing to sustain the business’ operations. “Firefly strategically bid and purchased the Virgin Orbit inventory for the significant cost savings on common off-the-shelf components that we use in our product lines, and the benefit of eliminated supply chain lead-times associated with critical flight components,” said Firefly in a press release.¹⁶ In September, Firefly and the U.S. Space Force partnered to launch a satellite to orbit 27 hours after receiving the launch order, breaking the previous record of 21 days, according to the Washington Post.¹⁷ This launch utilized Firefly’s Alpha launch vehicle, a former competitor of Virgin Orbit’s LauncherOne vehicle.

To discuss tailwinds impacting the Air and Space Systems segments, 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.

Joe Collins, Analyst, was the lead Market Intelligence contributor to this article.

Endnotes

1. U.S. Bureau of Economic Analysis, “Personal Consumption Expenditures Price Index, Excluding Food and Energy,” https://www.bea.gov/data/personal-consumption-expenditures-price-index-excluding-food-and-energy, accessed December 7, 2023.

2. Hexcel Corporation, “Hexcel Reports 2023 Third Quarter Results,” https://s22.q4cdn.com/602714005/files/doc_financials/2023/q3/HXL-Q3-2023-earnings-release.pdf, accessed December 7, 2023.

3. AeroVironment, “AeroVironment Announces Fiscal 2024 Second Quarter Results,” https://investor.avinc.com/news-releases/news-release-details/aerovironment-announces-fiscal-2024-second-quarter-results, accessed December 7, 2023.

4. Aviation Week, “Europe Facing Lowest Launch Rate in 40 Years,” https://aviationweek.com/shownews/paris-air-show/europe-facing-its-lowest-launch-rate-40-years, accessed November 28, 2023.

5. Space News, “EU finalizing contract with SpaceX for Galileo launches,” https://spacenews.com/eu-finalizing-contract-with-spacex-for-galileo-launches/, accessed November 22, 2023.

6. Space Capital, “Space Investment Quarterly Report,” https://www.spacecapital.com/quarterly, accessed November 28, 2023.

7. Boeing, “The Boeing Co. Q3 2023 Earnings Call,” https://s2.q4cdn.com/661678649/files/doc_financials/2023/q3/3Q23-Earnings-Call-Transcript.pdf, accessed November 28, 2023.

8. U.S. Bureau of Transportation Statistics, “August 2023 U.S. Airline Traffic Data Up 8.4% from the Same Month Last Year,” https://www.bts.gov/newsroom/august-2023-us-airline-traffic-data-84-same-month-last-year, accessed November 27, 2023.

9. Associated Press, “United Airlines pilots ratified a new contract that their union says is worth more than $10 billion,”https://apnews.com/article/united-airlines-pilots-ratify-contract-afab5d9875b2b207b84fdd4b1eabe6c6, accessed November 28, 2023.

10. Reuters, “American Airlines pilots approve new contract that boosts compensation by more than 46%,” https://www.reuters.com/business/aerospace-defense/american-airlines-pilots-approve-new-contract-union-2023-08-21/, accessed November 28, 2023.

11. L3Harris Technologies, “Q3 2023 L3Harris Inc Earnings Call,” https://www.l3harris.com/sites/default/files/2023-10/LHX-3Q23%20Earnings%20Call%20Transcript%20-%2010.27.2023.pdf, accessed November 28, 2023.

12. BusinessWire, “Charger Investment Partners Expands its Composites Platform with the Acquisition of Unitech Composites,” https://www.businesswire.com/news/home/20231107987146/en/Charger-Investment-Partners-Expands-its-Composites-Platform-with-the-Acquisition-of-Unitech-Composites, accessed November 22, 2023.

13. BAE Systems, “BAE Systems Signs Agreement to Acquire Ball Aerospace,” https://www.baesystems.com/en-us/article/bae-systems-signs-agreement-to-acquire-ball-aerospace, accessed November 28, 2023.

14. SpaceNews, “Space Development Agency awards York Space $615 million contract for 62 satellites,” https://spacenews.com/space-development-agency-awards-york-space-615-million-contract-for-62-satellites/, accessed November 28, 2023.

15. SpaceNews, “Firefly Aerospace acquires Spaceflight Inc.,” https://spacenews.com/firefly-aerospace-acquires-spaceflight-inc/, accessed November 28, 2023.

16. SpaceNews, “Firefly to buy remaining Virgin Orbit assets,” https://spacenews.com/firefly-to-buy-remaining-virgin-orbit-assets/, accessed November 29, 2023.

17. The Washington Post, “After record flight, Firefly, Space Force look to accelerate launches,” https://www.washingtonpost.com/technology/2023/09/19/firefly-space-force-quick-launch-capability/, accessed November 29, 2023.