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

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

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

Consistent consolidation within the Air, Land, Sea, & Space (ALSS) Systems merger and acquisition (M&A) market has been propelled by favorable operating conditions for sector participants. In 2023, M&A transactions within the sector surged by 52.6% year-over-year (YOY), contrasting with a broader M&A decline of 22.6% YOY across the U.S., Canada, and Europe over the same period. This growth has been fueled by new contract opportunities and increased travel demand, attracting sponsors to the sector despite the broader slowdown in private equity activity.

Throughout 2023, buyers in the Air and Space subsegments dominated, accounting for 75.3% of deals, benefitting from favorable industry conditions despite the challenging economic landscape. While inflation has remained high at 3.5% (U.S. Bureau of Economic Analysis), leading strategic buyers in the sector have effectively navigated inflationary pressures and boosted gross margins to sustain profitability.

For instance, Hexcel (NYSE:HXL), a key manufacturer of composite structures for Commercial Aerospace and Space markets, witnessed a notable 230 basis point YOY gross margin improvement through Q3 2023, attributed to enhanced sales volume leverage, as per an earnings release. Similarly, unmanned aircraft developer AeroVironment (Nasdaq:AVAV) demonstrated a substantial 1,900 basis point YOY gross margin improvement in its fiscal Q2 2024 earnings release.

Although inflationary trends show signs of improvement, strategic buyers are expected to maintain their vigorous M&A activity in 2024, aiming to bolster their market positions within high-growth segments.

Tailwinds Drive Sustained Growth in Key Segments

In the global Space Systems market, a significant supply and demand imbalance has emerged, creating opportunities for expansion into new geographical regions. The conflict in Ukraine has driven Russian companies and investments out of the market, resulting in Europe experiencing its lowest satellite launch rate in 40 years in 2023, as reported by Aviation Week. This shift has led to a scarcity in the global launch industry, a situation described by Tory Bruno, CEO of United Launch Alliance, as unprecedented. In response, commercial space companies in the U.S. have increasingly been contracted to fill the void and provide launch capabilities internationally.

For instance, 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, marking a continuation of the ESA’s partnership with SpaceX. This increased reliance on U.S. space companies underscores the strength of the U.S. domestic space industry, fueled by heightened private sector investment. U.S. private sector investment in the space industry has outpaced China's spending, reaching $135.9 billion from 2014 through Q3 2023, according to Space Capital.

Meanwhile, in the Air Systems segment, players have experienced healthy year-over-year revenue growth, supported by robust travel demand. Boeing, a major commercial airplane manufacturer, reported a 13% YOY revenue increase driven by a higher volume of commercial airplane deliveries. This trend is expected to continue as U.S. airline traffic grows, with passenger enplanements for domestic and international flights rising 8.4% YOY in August 2023. Additionally, the resolution of labor negotiations between commercial airlines and pilots is anticipated to prevent widespread delays and disruptions in air travel, further sustaining demand for sector players.

In the Defense end market, ongoing geopolitical conflicts involving U.S. allies are projected to boost federal spending on military air systems, providing further opportunities for growth in the sector.

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

Despite a relative slowdown in year-over-year M&A volume, public company buyers remained prominent, driving the majority of disclosed deal value. Public strategics collectively allocated $11 billion in disclosed enterprise value for acquisitions, representing a significant portion (79.7%) of the total disclosed enterprise value in 2023.

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

In 2023, the Air Systems segment emerged as a frontrunner in sector deal activity, representing 47.9% of total transactions, marking a notable 14.1% increase compared to 2022. Particularly, manufacturers specializing in composite aerostructures and components garnered significant attention from acquirers. Examples such as Kratos Defense's acquisition of Sierra Technical Services and Chargers Investment Partners' acquisition of Unitech Aerospace underscored the robust appetite for companies with composite manufacturing capabilities. Aaron Perlmutter, co-Founder and Partner at Charger Investments, highlighted the promising outlook for APEX following the acquisition of Unitech, emphasizing the company's position to support the growth of its esteemed customer base.

Meanwhile, M&A volume in the Space Systems segment throughout 2023 surpassed that of the previous year, with 40 transactions announced or completed, compared to 37 in 2022. Buyers honed in on commercial space companies offering diversified solutions across Defense and Civilian end markets. Strategic acquisitions, such as L3Harris' purchase of Aerojet Rocketdyne and BAE Systems' acquisition of Ball Aerospace, exemplified the strategic maneuvers of legacy defense companies seeking to bolster their market presence. With Ball's space-related offerings projected to contribute significantly to its revenue, BAE's acquisition is poised to accelerate its space systems strategy, as emphasized by Tom Arseneault, President and CEO of BAE.

AE Industrial Partners Continues to Lead Sector Consolidation Among Financial Buyers

In the landscape of Air, Land, Sea, & Space (ALSS) Systems, AE Industrial Partners (AEI), headquartered in Florida, has emerged as a key player in acquisition activities. Particularly notable is AEI's significant involvement in the sector during June 2023, where the firm concluded four transactions within ALSS Systems. These transactions, either direct acquisitions or facilitated through its portfolio companies, collectively accounted for 10% of the total financial buyer activity in the sector for the year. One of AEI's portfolio companies, York Space Systems, stands out as a flagship entity in the Space Systems and Small Satellite (SmallSat) segments. York secured a substantial contract worth $615 million from the U.S. Space Development Agency (SDA) in October 2023. This contract is aimed at producing 62 satellites for the Department of Defense's (DOD) LEO constellation, positioning York as the primary supplier of satellites for the SDA.

AEI's involvement in the ALSS Systems sector is further underscored by its participation in significant transactions:

1. Acquisition of Spaceflight by AE Industrial Partners-backed Firefly Aerospace (June 2023, Undisclosed):
Firefly Aerospace, a company within AEI's portfolio, completed the acquisition of Washington-based Spaceflight in June 2023. Spaceflight specializes in offering launch and in-flight transportation services for satellites, along with providing various sub-systems. Following this acquisition, Firefly intends to exclusively utilize Spaceflight's services on its own vehicles.

2. Acquisition of the Remaining Assets of Virgin Orbit by AE Industrial Partners-backed Firefly Aerospace (June 2023, $3.8 Million):
During Virgin Orbit's Chapter 11 bankruptcy proceedings, Firefly Aerospace, backed by AEI, acquired the remaining assets of Virgin Orbit for $3.8 million. This strategic move provided Firefly with significant cost savings on common components and eliminated supply chain lead times. Notably, Firefly's collaboration with the U.S. Space Force for a record-breaking satellite launch, utilizing its Alpha launch vehicle, further solidified its position in the sector.

For a deeper dive into the prevailing trends influencing the Air and Space Systems segments or to receive tailored updates on your business, we invite you to engage with us further.

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