With an already very large and successful presence in the USA, confirmation from this morning from BAE Systems that it has entered into a definitive Asset Purchase Agreement to acquire Collins Aerospace’s Military Global Positioning System business (“GPS business”) for $1.925bn in cash, subject to customary closing adjustments plus also that it has entered into a definitive Asset Purchase Agreement to acquire Raytheon’s Airborne Tactical Radios business (“Radios business”) for $275m in cash, subject to customary closing adjustments, really is excellent news.
The proposed acquisitions are both very high-quality technology-based businesses that fit exceptionally well with BAE Systems medium and long-term growth strategy. In terms of background, United Technologies had acquired Rockwell Collins in November 2018 and subsequently merged the acquired business with that of UTC Aerospace Systems to form Collins Aerospace. Subsequently, in June 2019 Raytheon announced a merger of equals deal with the aerospace companies of United Technologies.
In the BAE Systems announcement confirming the proposed two acquisitions the company states that as asset purchases there would be an anticipated tax benefit of c.$365 million on the GPS business and c.$50m of the Raytheon Radios business. Completion of both acquisitions remains subject to successful closure of the Raytheon-United Technologies Corporation (UTC) merger, as well as customary regulatory approvals and conditions.
In the edited statement accompanying the announcement below BAE Systems states that the two proposed acquisitions “represent a unique opportunity to purchase high quality technology-based businesses with market leading capabilities and long histories of pioneering innovation in their fields. These assets have come to market as part of the regulatory process relating to the merger of Raytheon and UTC.
Both businesses are highly complementary to BAE Systems US-based Electronic Systems business and on completion the intention is that they would be integrated into the Electronic Systems division. The company states that “both businesses have strong growth outlooks driven by close alignment with the priorities outlined in the US National Defense Strategy, Congressional mandates to upgrade existing capabilities and a presence on a substantial installed base of products and platforms in the US and with allied nations and that both transactions would be expected to be immediately earnings and cash accretive”.
Charles Woodburn, Chief Executive of BAE Systems comments in the statement that “These proposed acquisitions present a unique opportunity to add high quality, technology focused businesses to our Electronics Systems sector. It’s rare that two businesses of this quality, with such strong growth prospects and close fit to our portfolio, become available. The strategic and financial rationale is strong and these proposed acquisitions, which are focused on areas of highest priority defence spending, will further enhance the Group’s opportunity for continued growth in Electronic Systems. We look forward to welcoming the employees of the two businesses to the Company, as we work together to help drive our business forward successfully.”
Proposed Acquisition Detail
Highlights of the proposed acquisition of Collins Aerospace’s Military Global Positioning System business (“GPS business”) are stated in the announcement as being that the operation as being:
· Global leading provider of mission critical military GPS receiver solutions
· Installed base on over 280 different platforms across ground, air and individual weapon systems
· High growth potential from strong positioning for next generation technology development
· Revenue CAGR of 10% + over the next four years with sustained margins expected
· Margins, earnings and cash expected to be immediately accretive
· ROIC > WACC expected in 3rd full year post completion
· Highly complementary fit to enhance Electronic Systems technology and existing capabilities
· All cash consideration, to be funded by new external debt
Collins GPS Business Activity
“The GPS business is the leading provider of mission critical military GPS receiver solutions and has been a pioneer in military GPS receiver markets for over 40 years. Today the company designs and produces advanced hardened and secure GPS products that include next-generation M-Code technologies.
The business operates across a broad base of customers and platforms and is well positioned in the highly attractive, US-focused defence electronics and weapon systems end markets. The GPS business has fielded over 1.5 million units and currently has a presence on over 200 ground, 40 airborne and 40 weapons platforms and is a key provider on the two highest volume weapons programmes for the US Air-Force.
The GPS business brings both industry leading GPS receiver products and a broad platform footprint, based on its long track record of technological innovation that has led to increasing product performance whilst simultaneously reducing size and cost. The business is based in Cedar Rapids, Iowa, with approximately 675 employees and post-acquisition, and would be integrated into BAE Systems Electronic Systems division”.
Strategic Rationale Behind Proposed Acquisition
“Driven by the secure geo-positioning needs of the modern battlespace, the company expect the business to see continuing strong customer demand for its product portfolio as precision munitions are expected to play an increasingly critical role in military operations. The GPS business is developing the next generation M-Code GPS technologies for the US military. Utilisation of M-Code increases security, integrity and availability with US Congress having mandated M-Code for all military GPS user equipment after October 2020. The GPS business is well positioned to provide the M-Code upgrade to its existing product base, which includes some of the highest volume Air Force and Army programmes. In total over 700 platforms are anticipated to be transitioned to M-Code”.
“The GPS business will be highly complementary to the company’s priority growth area of precision guided munitions Electronics Systems division. This has “high growth potential as a result of its technological strength and is well positioned to participate in the next cycle of generational upgrades across its sizeable installed base. As it complements both BAE Systems’ defence electronics capabilities and has pan domain systems presence there are significant opportunities for respective product lines within what is considered to be an important growth area”.
Financial Impact of GPS Business
“The GPS business is expected to achieve revenues of approximately $359m and adjusted EBITDA of approximately $127m in 2020 and has strong future growth potential with an expected revenue CAGR in excess of 10% over the next four years, with continued growth expected thereafter. EBITDA margins are expected to be sustained”.
“The gross acquisition price of $1.925 billion represents a transaction multiple of 15x estimated 2020 EBITDA or 12x when adjusted for the tax benefits mentioned above. The proposed acquisition would be expected to be immediately earnings and cash flow accretive and would be expected to achieve a return on invested capital in excess of cost of capital in the third full year post completion”.
“The proposed acquisition of the GPS business would be funded by new external debt and constitutes a Class 2 transaction for the purposes of the UK Financial Conduct Authority’s Listing Rules. During the full year ended 31 December 2018, the GPS business generated total revenue of $254 million and EBITDA of $98 million. As at 30 September 2019, the GPS business had gross assets of $106 million”.
Raytheon Airborne Tactical Radio Business Strategic Rationale
The strategic rationale behind the proposed purchase is based “on the business being a leading provider of airborne tactical radio solutions. The ‘Radio’ business designs, manufactures and supplies a broad range of mission-critical communication systems to the US Department of Defense, allied governments and large defence aircraft manufacturers. The company has a long history of innovation that has resulted in development of valuable intellectual property to support its secure communications with a significant installed base of radios across a number of allied countries”.
BAE Systems believes that “the ‘Radios’ business is a strong strategic fit adding as it would, complementary positions in the airborne communications domain including software-defined radio capabilities and a catalogue of waveforms”. The acquisition provides BAE Systems with “a certified indigenous encryption capability, an essential part of secure communication systems which feature robust anti-jamming, multi-band, multi-channel and encryption capabilities. It is differentiated by its industry-leading and battle-proven performance in challenging environments”.
BAE Systems believe that “the combination of the Radios business’s robust existing order backlog and strong positioning for the continued modernisation of secured communication technologies underpins its long-term growth potential. The business is based in Fort Wayne, Indiana, and Largo, Florida, with c.100 employees and post-acquisition, would be integrated into our Electronic Systems division”.
Financial Impact of Proposed Raytheon Airborne Tactical Radio Business
The Radios business “is expected to generate revenue of approximately $125m in 2019 and has strong growth potential underpinned by US Department of Defense and NATO mandates for cryptographic and anti-jamming modernisation of software defined radios. The proposed acquisition is expected to be immediately earnings and cash flow accretive, and achieve a return on invested capital in excess of cost of capital in the first full year post completion. It would be funded by existing cash on the balance sheet”.
CHW (London – 20th January 2020)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785