Red Hot Defence Market Growth

Red Hot Defence Market Growth Looks Set to Continue as Australian Defence Deals Increased by 200% Between 2007 and 2008

Jane’s Industry Quarterly report, The Call of America: Mergers and Acquisitions activity in the defence sector in 2008, and the outlook to 2010

Published May 2009

LONDON (28th April 2009) – International interest in the Australian defence market sent deal values and volumes soaring by 200% Jane's Industry Quarterly reveals.

Commitment to military modernization in Australia will see defence spending increase by 3% per year until 2018 which is the primary factor driving acquisition activity in the Australian market.

Jane’s Industry Quarterly Editor Guy Anderson explained, “Over the last two years Australia has proved the red hot market with a 200% increase in defence deals between 2007 and 2008. It is Jane’s Industry Quarterly’s belief that activity in Australia will continue, with those that already have a foothold bedding in still further.”

Australian activity accounted for 4.4% of the world’s total merger and acquistion activity in 2008; in 2007 it took less than 1%.

“Greg Comber, Australia’s defence minister, announced that the next decade will see more than AU$100 billion spent on defence with approximately two thirds of that going to Australian companies,” continued Anderson.

“Australia’s approach to procurement has driven deal activity, particularly on the part of foreign entrants. The absence of a formal offset policy mandating local involvement largely negates the need for formal teaming arrangements in Australia,” continued Anderson. “However, Ian King, BAE Systems chief executive, has previously commented on Australia's preference for local involvement, while Jane's Industry Quarterly notes that procurement decisions tend to favour domestic suppliers, where feasible and notwithstanding the stated policy of non-discrimination against foreign firms.”

Two companies at the forefront of expansion into Australia are BAE Systems and QinetiQ, both from the UK.

BAE Systems can legitimately claim to be Australia's largest defence group following the completion of its U.S. $679 million acquisition of the country's largest defence organisation, Tenix Defence, in June 2008. Tenix was integrated with the operations of BAE Systems Australia, headquartered in Adelaide.

Jane’s Industry Quarterly Summary

Jane’s Industry Quarterly explains why one particular class of buyers rose to prominence. It examines the market sectors that remain strong and the drivers that will shape the acquisitions landscape for the remainder of the decade whilst identifying the sectors likely to thrive in the coming era of austerity.

The benign financial environment and frenetic competition for targets that drove the value of global mergers and acquisitions activity within the defence sector to U.S. $29.7 billion in 2007 had started to stall by the third quarter of the year. Activity levels remained heavily subdued throughout 2008

The total disclosed value of acquisitions plummeted 35.3% year on year to U.S. $19.2 billion in 2008, while the volume of activity fell in tandem from 184 deals in 2007 to just 118 in the same period.

A dearth of credit and a rediscovered need to preserve cash combined to shake out many of the lower tier defence organisations that had driven the lion’s share of deals in 2007, while private finance-backed acquisitions – which accounted for almost one in ten deals the previous year were relatively scarce.

Despite t harsher climate for deals, it would be wildly inaccurate to argue that the global economic downturn had laid waste to acquisitions activity. There were a number of constants, some of which bode well for deal activity for the remainder of this decade.

Deal values held have held firm in the defence industry: prices paid for acquisition targets scarcely changed from the peaks of 2007 thanks to a combination of a shortage of distressed sellers and continued competition for prime targets.

The headline falls in deal activity mask the resilience of the prime contractors: their acquisitions strategies continued virtually unabated in 2008 with activity levels scarcely changed from the previous year. Jane’s Industry Quarterly believes their overall strong balance sheets, enviable liquidity positions, and the continued confidence of investors leave them well placed to meet acquisitions aspirations over the coming years. Strategic investors at the upper end of the second tier have provided similar reasons for optimism, having achieved non-organic growth during the current year and having emerged with a degree of headroom (and an appetite) for further activity.

The outlook for smaller organisations (typically with revenues below U.S. $250 million per annum) is less certain: barring a rapid (and unlikely) return of the credit availability and optimistic climate of 2006 and 2007, they are unlikely to return as buyers to a significant degree. There are reasons to believe, furthermore, that some of those further down the supply chain could shift from hunters to prey.

Jane’s Industry Quarterly believes liquidity issues could lead prime contractors to intervene in order to prevent critical gaps forming in supply chains: a shift in acquisition strategy from growth to preservation. Likewise, the possibility of smaller struggling companies seeking buyers to ensure survival should not be discounted.

Jane’s Industry Quarterly is published by IHS Jane’s, an IHS (NYSE: IHS) company.

ENDS

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