US defense firms look to Europe for acquisitions

The United Kingdom is the prime target as US aerospace and defense corporations head for Europe to seek new acquisition opportunities, says a new report by accounting firm PricewaterhouseCoopers.

The emerging trend of acquisition in Europe is driven by the threat of a slowing in US defense spending growth, and increasing evidence that the current high operational tempo of American forces may postpone spending on platforms and reduce research, design and technology work.

Due to its openness to foreign contractors, the United Kingdom tends to top the lists of US suppliers seeking to grow overseas. General Electric's recent $4.8 billion purchase of the Smiths Group's aerospace activities could be the first of many as US corporations seek opportunities in the British market, the report says. That deal still awaits completion.

PricewaterhouseCoopers says most of the remaining medium-sized aerospace and defense companies, privately owned businesses and non-core divisions of larger groups here are likely to come under US firms crutiny.

Cobham, Meggitt and Ultra Electronics are among those mentioned in the British media recently as potential takeover targets.

Acquisition activities by US companies in Europe totaled $2.4 billion across 2005 and 2006. By contrast, acquisition money flowing in the opposite direction amounted to $5.6 billion, the largest item on the European shopping list being BAE Systems $3.5 billion purchase of United Defense Industries.

After a pause for breath in 2006, the signs are that this year will see a resumption of the trend towards European acquisitions in the US. Meggitt's recent $1.8 billion purchase of K&F Industries is the latest example.

The prediction of increased US activity in Europe came against a background of rising mergers and acquisition business across the aerospace and defense sector as a whole in 2006.

The disclosed value of deals in the sector exceeded $33 billion in 2006,” says the report. “While not yet up to the previous high of 2000, when over $50 billion was invested, this is comfortably above any of the previous five years.”

Europe accounted for $21 billion of merger and acquisition activity in 2006, the US $10 billion and the rest of the world $2 billion. Civil aerospace dominated the deals, with BAE Systems sale of its 20 percent stake in Airbus leading the field at $3.5 billion.

PricewaterhouseCoopers says two other trends to watch for are the increasing presence of Middle Eastern and private equity investors in the sector. The report says the sector is attracting record levels of private equity money.

Barring unforeseen events, the report reckons high levels of merger and acquisition activity will be sustained for at least the next two years.

It is expected that US corporates will be on the on the hunt for European (and particularly UK) assets, continuing tier 2/3 consolidation and asset shuffling between major players as they realize scale is important and make their choices about where they concentrate their efforts.

Below all this, the search for strong positions in new technology will go on, providing an undercurrent of M&A,” says the report.

The company singles out composites; C4ISR; chemical, biological, radiological and nuclear; and UAVs as some of the technology sectors where merger and acquisition activity may increase.

Source: A. Chuter - defencenews.com

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