17 Jun 19. No-deal ‘a critical risk’ to UK aviation, warn bosses. The UK aerospace sector has attacked “extreme” politicians endorsing a no-deal departure from the European Union, warning at the Paris Air Show that opens today that it would inevitably prevent leading companies from competing on the global stage.
Aviation businesses are poised to continue ratcheting up contingency plans ready for the October 31 Brexit deadline “very soon”, according to industry leaders.
One of the country’s biggest business groups has cut economic growth forecasts for next year and 2021, lamenting “downward pressure” on activity and investment as a result of stockpiling. The British Chambers of Commerce lifted its 2019 projection from 1.2 to 1.3 per cent, pointing to a “temporary boost from historically high stockpiling”, but downgraded its expectations for 2020 from 1.3 to 1 per cent and for 2021 from 1.4 per cent to 1.2 per cent.
With more than 300,000 people set to arrive in Le Bourget for the biennial show this week, Paul Everitt, chief executive of ADS, the British trade organisation representing businesses operating in the aerospace, defence, security and space sectors, expressed “strong concern about the long-term damage that we are doing to our reputation as a good place to do business”.
Mr Everitt, 56, argued that “all but the most extreme” regard leaving the EU without a deal “as the worst outcome” and urged political leaders to rule out any such step.
Boris Johnson, frontrunner in the Conservative party leadership contest to succeed Theresa May as prime minister, has vowed to ensure Brexit takes place by October 31, deal or no deal.
The British aerospace sector “may be able to get through” the short-term disruption of a no-deal Brexit, Mr Everitt said, “but if that becomes the norm, we become uncompetitive globally. There would be significant consequences [for] UK manufacturing.”
Preparations for the initial spring Brexit deadline this year are understood to have cost the industry about £600m. “We’ve all spent a lot of money,” Mr Everitt said. “In the run-up to March there was stockpiling, warehousing, other contingency arrangements. Now we face a similar situation very soon given the political dialogue where we will be having to prepare for the worst possible outcome.”
Companies would do all they could “to ensure customers continue getting our products” in the event of a no-deal Brexit, “but that should not be confused with whether we will be competitive in the long term. We definitely won’t be.”
ADS represents more than 1,000 businesses in the aerospace, defence, security and space sector.
Lowering its economic forecasts for UK growth, the BCC concluded that it was likely that growth would remain subdued “for some time to come”.
- Liam Fox, international trade secretary, will fly to Turkey today. Whitehall officials hope to preserve preferential terms of trade with Turkey, which has a customs union with the EU, for British companies after Brexit. Dr Fox said the deal was “more crucial than ever for Britain as we prepare to leave the EU”. (Source: The Times)
17 June 19. Serco turned down twice in merger approach to Babcock. Serco is on the prowl to consolidate the government contracting and privatised public services market after it emerged that it has twice been rebuffed in attempts to merge with Babcock, the Ministry of Defence operator.
Industry sources have said Serco twice approached Babcock over the winter in an attempt to open talks to create an outsourcing super-company with £8bn of annual revenues.
The approaches, at the end of last year and at the end of January, came when Babcock appeared to be in disarray. With a share price in steep decline, it had become destabilised after anonymous reports by an outfit calling itself Boatman Capital. Those reports questioned Babcock’s accounting, the way it was communicating bad news and the leadership of its veteran chairman, Mike Turner. Serco’s second approach came as Mr Turner, 70, announced his decision to step down amid queries about Babcock’s corporate governance.
Serco is valued on the stock market at £1.7bn and operates in immigration and prisoner services, hospitals, defence and transport, including the operation of the Caledonian Sleeper train. Babcock is valued at £2.3bn. In the defence sector it helped to build the UK’s new aircraft carriers. It also runs the biggest fleet of privately owned helicopters in Europe.
Over the past year Babcock’s share price has almost halved. Shares in Serco are up by almost a third. Rupert Soames, 60, chief executive of Serco, has made no secret of his desire to make acquisitions in the sector. Serco bought Carillion’s hospital contracts before Carillion went bust last year. (Source: The Times)
14 June 19. Rolls-Royce approached for stake in Spanish engine business. Spain’s Indra Sistemas has expressed interest in buying a majority stake in ITP Aero. Rolls-Royce has been approached by Spain’s Indra Sistemas about the possible purchase of a majority stake in its Spanish aircraft engine manufacturing business ITP Aero. The FTSE 100 aero-engine group said on Friday it had received a “preliminary and conditional indication of interest” from Indra, a Spanish technology group. It added that there was no certainty the approach would lead to a sale. ITP is the ninth largest-aircraft engine and components company in the world by revenue, with turnover of €880m last year. Rolls-Royce bought it out in 2016, paying €720m for the 53 per cent of the company it did not already own. Rolls-Royce said on Friday that ITP was a “key partner” and that it “intends to retain a long-term relationship with the business” regardless of any deal that takes place with Indra. (Source: FT.com)
14 June 19. GKN looks to expand defence business. GKN Aerospace expects to grow the defence side of its business in the coming years through new opportunities and the ramp-up of the Lockheed Martin F-35 Lightning II Joint Strike Fighter programme.
Speaking ahead of the Paris Airshow, company CEO Hans Büthker said that the current military-to-civilian balance within the company of 29% and 71% respectively, will change in the near-future in favour of the military, as the F-35 programme (for which GKN is the sole-supplier of the canopy and other parts) and other programmes pick-up.
“We expect to see more defence growth for the company – it would be a good thing to do,” Büthker said, noting that it is the anticipated ramp-up to full-rate production of the F-35 over the coming years in particular that will drive this growth.
Besides GKN’s F-35 work (it also provides titanium structures, composites, exotic metals, and anti-icing protection for the fifth-generation combat aircraft), the company also has significant technologies on other military platforms such as the Boeing F-15 Eagle, Boeing F/A-18 Hornet, Lockheed Martin F-22 Raptor, Eurofighter Typhoon and Saab Gripen combat aircraft (canopies and other items), Airbus Defence and Space A400M airlifter (metals and composites), Lockheed Martin C-130J Hercules transport aircraft (engine nacelles), Sikorsky CH-53K King Stallion heavy-lift helicopter (aft fuselage), and several Airbus Helicopters rotorcraft (fuel tanks).
Further to these established and publicised programmes Büthker hinted at other more classified projects, saying that GKN was working on “undisclosed platforms” in the US. In 2016 it was revealed that GKN had been contracted to work on the Northrop Grumman B-21 Raider long-range strike bomber; it is this project that Büthker was likely referring to. (Source: IHS Jane’s)
14 June 19. Scisys’ knockout bid sends shares into orbit. Scisys (SSY:250p), a supplier of bespoke software systems to the media, space, defence and commercial sectors, has received a knockout 254p-a-share cash bid this morning from CGI, a Canadian IT and business consulting group, that values the equity at £79m. The offer represents a premium of 24 per cent over the previous closing price and equates to a multiple of 18 times house broker FinnCap’s earnings per share estimate of 14p for the 2019 financial year after factoring in 15 per cent growth in this year’s pre-tax profits.
The recommended offer has the backing of directors who control 25 per cent of the issued share capital and exceeds the 230p target price I highlighted in my article a month ago when I last suggested buying the shares, at 204p (‘Scisys’ space division flying higher’, 14 May 2019). Longer-term followers who bought when I initiated coverage, at 102p, in the autumn of 2017 (‘Tune into a media play’, 11 October 2017), will have made a 149 per cent capital gain and banked useful dividends over the past 20 months, too. Shareholders will also receive the final dividend of 1.73p a share, which will be paid on 26 July.
It’s easy to see why CGI is interested in Scisys given the UK company’s commanding position in the space and defence markets. Scisys’ space division is absolutely flying. Having Brexit-proofed this operation by redomiciling the company to Dublin at the end of November, the company subsequently won €23.3m (£20m) of new contracts on European Space Agency (ESA)-funded projects between mid-December and the end of January.
Strategically, the acquisition will deepen CGI’s expertise in these two key markets, expand its geographic footprint in the UK and Germany, where CGI doesn’t currently have offices, and offer the combined business scope to win larger contracts with the Canadian group’s greater financial backing and scale. In the 2018 financial year, CGI posted group revenues of C$11.5bn, employing 77,000 staff across the Americas, Europe and Asia Pacific.
Of course, there is a remote possibility another bidder could come in with a higher offer. However, I feel that’s unlikely – the mid-market price of 250p is shy of the offer price, suggesting other investors concur with this view – so I am happy to recommend accepting the cash, given that my target price has been exceeded by more than 10 per cent. Accept. (Source: Investors Chronicle)
13 June 19. Thales to be included in CAC40 index.
- Euronext’s Index Steering Committee, which meets four times a year to validate the list of 40 stocks making up the CAC40, has decided today to include Thales in the benchmark French stock market index.
- Thales will be included in the CAC40 from June 21st 2019 after market closing.
- The inclusion of Thales in the CAC40 reflects the substantial increase in the company’s market capitalisation, which stood at €21.7bn at 31 December 2018 compared with €9.6 bn at 31 December 2013 (an increase of 126% in five years). This increase was driven by improved earnings: EBIT increased by 67% over the same period, from €1.0bn in 2013 to €1.7bn in 2018, and is expected to reach close to €2bn in 2019.
- Euronext’s decision is an endorsement of unflagging efforts by the company’s staff to continuously improve operational performance while innovating on a permanent basis.
The increase in EBIT margin between 2013 and 2018 reflects the Group’s constant efforts to improve operational performance. The Group is pursuing its transformation through the Ambition 10 strategic plan and related performance initiatives. This improved profitability is also a reflection of the outstanding engagement of the employees of a global technology leader with innovation and R&D written into its genetic code: including Gemalto, R&D investments now exceed €3 bn, of which €1 bn is self-funded.
14 June 19. Recommended Cash Offer For Scisys Group Plc By CGI Group Holdings Europe Limited, a wholly-owned indirect subsidiary of CGI Inc. to be implemented by way of a scheme of arrangement under Chapter 1 of Part 9 of the Companies Act 2014.
- CGI Inc. (“CGI”) and SCISYS Group plc (“SCISYS”) are pleased to announce that they have reached agreement on the terms of a cash offer, unanimously recommended by the SCISYS Board, pursuant to which CGI Group Holdings Europe Limited (“Bidco”), a wholly owned indirect subsidiary of CGI, will acquire the entire issued and to be issued ordinary share capital of SCISYS.
- Under the terms of the Acquisition, SCISYS Shareholders will be entitled to receive for each SCISYS Share 254.15 pence in cash (the “Consideration”)
- The Acquisition values the entire issued and to be issued ordinary share capital of SCISYS at approximately £78.9m.
- The Acquisition represents a premium of approximately:
- 24.6 per cent. to SCISYS’ Closing Price of 204.00 pence on 13 June 2019 (being the last practicable date prior to the publication of this Announcement);
- 43.7 per cent. to SCISYS’ volume weighted average Closing Price of approximately 176.89 pence over the six month period ended on 13 June 2019; and
- 47.0 per cent. to SCISYS’ volume weighted average Closing Price of approximately 172.91 pence over the twelve month period ended on 13 June 2019.
- The Consideration is in addition to the payment of the final dividend of 1.73 pence per SCISYS Share for the period to 31 December 2018 approved by SCISYS Shareholders at the annual general meeting on 6 June 2019 (the “Declared Dividend”), which will be paid on 26 July 2019 to holders of SCISYS Shares who are on the register of members at the close of business on 28 June 2019.
- If any dividend or other distribution (whether in cash, assets, shares or other securities of any member of the SCISYS Group) is authorised, declared, made or paid in respect of the SCISYS Shares on or after the date of this Announcement, other than the Declared Dividend, Bidco reserves the right to reduce the Consideration by the aggregate amount of such dividend or other distribution.
- Commenting on the Acquisition, Mike Love, Chairman of SCISYS, said:
“The Board of SCISYS is unanimously recommending this deal to shareholders, viewing it as a wholesale endorsement of the success SCISYS has achieved to date. We believe SCISYS and CGI are highly complementary businesses sharing similar values and are confident that the combination will enable SCISYS to benefit from CGI’s size, strength and global reach.”
- Commenting on the Acquisition, George Schindler, President and CEO of CGI said:
“CGI’s offer to merge its operations with those of SCISYS is aligned to our Build and Buy strategy, providing opportunities to expand our industry depth in space, defense, government and media in the UK and Germany. SCISYS’ industry-leading expertise and IP-based services and solutions will provide an opportunity to globalise certain platforms utilizing the broader CGI geographic footprint and client relationships.”
BATTLESPACE Comment: Scisys caught the Editor’s eye earlier in the year as ‘one to watch,’ and as announced the Editor bought some shares. (See: BATTLESPACE UPDATE Vol.21 ISSUE 05 04 February 2019 BUSINESS NEWS, Shares in Scisys marked up). At the Earnings brief last Friday June 7, CEO Klaus Martin Heidrich was tight lipped when the Editor suggested that the company could be a bid target rather than one on the acquisition trail! He said that given the mix of industries, space, defence and media, that they wouldn’t be a bid target! The Editor sent an email after the brief asking if he would be a candidate for BATTLESPACE Businessman of the Year 2020. When no reply came the Editor sent a reminder and Klaus replied saying. “Sorry for responding only now. I am extremely busy this week and will be back to you and to Ken next week.” Now we know why! (SEE: BATTLESPACE ALERT Vol.21 ISSUE 12, 14 June 2019, Recommended Cash Offer For Scisys Group Plc By CGI Group)
13 June 19. Plug Power Buys UAV Fuel Cell Specialist EnergyOr. Plug Power Inc., a provider of hydrogen engines and fueling solutions enabling e-mobility, today announced the acquisition of EnergyOr’s technology, assets, and personnel. EnergyOr is based in Montreal, Canada, and is the leader in advanced lightweight and compact PEM hydrogen fuel cell (HFC) systems for robotics, small scale material handling and aerospace applications.
The purchase of EnergyOr’s assets allows Plug Power to integrate small, ultralightweight fuel cell technology into its already robust portfolio of ProGen hydrogen fuel cell engines in a capital efficient manner. This acquisition facilitates the adoption of more powerful, viable, and clean technology solutions for both commercial and military applications that necessitate lightweight fuel cell systems. EnergyOr’s current technology enables larger payloads for the robots, while extending run-time 2 to 4 times that of a lithium ion battery solution, further enhancing Plug Power to position as a comprehensive hydrogen fuel cell solutions provider for the future needs of logistics applications.
This acquisition allows Plug Power to address new applications beyond its core market of material handling. Through Plug Power’s established sales channels, the company will take the technology to market at volume scale, expanding into applications including small scale robotics, unmanned aerial vehicles (UAV), and other autonomous applications. The USA-manufactured products will incorporate EnergyOr’s lightweight systems into current Plug Power offerings, while applying Plug Power’s proprietary MEA stack technology to improve EnergyOr’s products’ cost effectiveness and efficiency.
“As we continue to grow, we are the go-to company in applying fuel cell technology across a broad range of applications,” said Plug Power’s CEO Andy Marsh. “It’s a natural progression for us to take our innovative technology and what we have learned in the material handling and e-mobility spaces and apply that to other industries that will thrive with HFCs. EnergyOr is the expert in the UAV fuel cell market, and we are excited to incorporate their technology and expertise as part of the Plug Power team.”
EnergyOr is a leader in aerospace UAV applications, setting several world records for endurance flights through the use of their fuel cell technology. In March of 2015, they powered the world’s first fuel cell multirotor UAV, later used in conjunction with the French Air Force’s Centre d’ Expertise Aérienne Militaire (CEAM). In December 2015, the H2 Quad 400 was developed, becoming the first fuel cell Quad rotor in the world to operate outdoors in a real-world environment. HFC solutions provide longer duration flights and the benefits of fast fueling, allowing customers to maximize the utilization of these assets.
“This acquisition combines two complementary businesses that will expand the capabilities of hydrogen fuel cell technology in the world of electrification,” said Michel Bitton, President and CEO of EnergyOr. “We look forward to working with the Plug Power team that has a proven track record of commercial success across a variety of industries. We are of the same mind: hydrogen fuel technology is the future of e-mobility, and we’re working together to continue to make that future a reality.”
“Over the course of my career, I have seen the broad applications of hydrogen fuel cell technology, and UAVs are just one of the many industries that hydrogen power can disrupt,” said EnergyOr’s CTO, Thomas Jones. “Partnering with the Plug Power team, with their resources and business acumen, will enable us to continue to push the envelope of integrating and advancing HFCs into a variety of autonomous applications”
EnergyOr, a Plug Power company, is now a wholly-owned subsidiary of Plug Power and will maintain its status and presence as a Canadian company. (Source: UAS VISION)
13 June 19. HAL posts record turnover. Hindustan Aeronautics Limited (HAL) achieved an “all-time high turnover” of INR197.05bn (USD2.83bn) in fiscal year (FY) 2018–19, registering year-on-year growth of 7.8%, the state-owned Indian company has announced. HAL said in a press release that its audited results for FY 2018–19 – approved by shareholders on 11 June – also showed a 14.8% increase in profit after tax, which climbed to INR22.83bn. HAL added that its orderbook position as of 31 March stood at INR580bn. The company added that in FY 2019–20 it expects the orderbook to be bolstered by fresh orders from the Indian government for its Tejas Light Combat Aircraft (LCA) and its Light Combat Helicopter (LCH). (Source: IHS Jane’s)
13 June 19. Thales updates its 2019 financial objectives following the integration of Gemalto. 2019 objectives for the “Digital Identity and Security” (DIS) operating segment:
- Organic sales growth between 0% and 2%, in line with expectations
- EBIT between €240 and €260m, corresponding to an underlying margin of around 10%, comparable to the rest of the Group
€120m of run-rate cost synergies, at the top end of the initially announced range, after taking into account the disposal of Thales’s GP HSM business
Confirmed outlook for all other businesses
New 2019 Group objectives:
- Order intake slightly above €18bn
- Organic sales growth between 3% and 4% (unchanged)
- EBIT between €1,980m and €2,000m
13 June 19. CIA linked venture capital firm establishes Australian presence. A US technology investment company with close ties to the Central Intelligence Agency has set up shop in Australia to scout out local start-ups for tech that could assist US national security. In-Q-Tel opened an office in Sydney last year. Its website says its mission is to accelerate introduction of cutting-edge technologies that protect and preserve national security.
“Our success is measured by the value our investments deliver to the government’s ability to further national security capabilities,” it says.
That’s not for the exclusive use of the US. It also says it wants to reach start-ups and the venture capital community outside the US and to better contribute to the national security of the US and its allies.
Already it is in advanced negotiations with an unidentified Australian space company, according to Fairfax newspapers, which quoted an industry source who said In-Q-Tel was invited in by the Australian government.
A spokesperson for Prime Minister Scott Morrison confirmed that was indeed the case.
“Australian agencies work closely with international partners on a range of national security issues, including innovation and technology,” the spokesperson said.
“This partnership with In-Q-Tel will help ensure Australian agencies have access to new technologies which can boost our national security capabilities.”
The Sydney office is run by former US Marine Mike Ferrari, who wrote on his LinkedIn profile:
“Taking the IQT show on the road to Sydney, Australia to reach start-ups and the venture capital community outside the United States to better contribute to the national security of the US and its allies.
“Innovation knows no boundaries, and a physical presence overseas (incl. London as well) is a continuation of our efforts to obtain a better understanding of technology and market developments outside the United States.”
Fairfax said in recent weeks that Ferrari had been approaching various start-ups with proposals for investment. In-Q-Tel, formerly called Peleus, was founded in 1999 by former Lockheed Martin chief executive Norm Augustine and video games designer and venture capitalist Gilman Louie, its first CEO. It was set up as a not-for-profit venture capital firm, based in Arlington, Virginia, also the home of the CIA.
The Q in the names is apparently a direct reference to Q – maker of useful and lethal spy gadgetry – in the James Bond books and movies.
In-Q-Tel’s website lists a very large number of companies with which it has done business. One of its better known investments was in company Keyhole, subsequently acquired by Google and producer of the ubiquitous Google Earth and related software. In-Q-Tel has a diverse range of tech interests. Its website cites data analytics, cyber security, artificial intelligence and machine learning, biotechnology, commercial space, communications, and power and energy. (Source: Space Connect)
13 June 19. Riverlane, Europe’s most advanced quantum computing software developer, has raised £3.25m in seed funding, led by venture capital investors Cambridge Innovation Capital and Amadeus Capital Partners, with the participation of Cambridge Enterprise.
Riverlane is building a simulation engine for microscopic systems to replace expensive laboratory tests with computer simulation. Riverlane’s software leverages the capabilities of the quantum computer, which operates using the principles of quantum mechanics. In the same way that graphics processing units (GPUs) accelerate machine learning workloads, Riverlane uses quantum computers to accelerate the simulation of quantum systems.
The company is working with leading academics and companies on critical early use cases for its software, such as developing new battery materials and drug treatments. Riverlane will use its seed funding to demonstrate its technology across a range of quantum computing hardware platforms, focused on early adopters in materials design and drug discovery. It will also expand its team of quantum software researchers and computational physicists.
Riverlane was founded by Dr Steve Brierley, Senior Research Fellow in Applied Mathematics at the University of Cambridge. Steve has over a decade of research experience in quantum information and computation, investigating the theory of quantum systems, architectures for quantum computers and quantum algorithms.
Steve Brierley, CEO of Riverlane, said: “This seed funding allows us to accelerate our work at a critical time in the development of quantum computers. Computers are central to the design of many new products but when we try to model systems at the level of individual atoms, the rules that govern their behaviour are fundamentally different. Even huge supercomputers are limited to approximations. As a result, the design of new drugs and materials remains primarily a laboratory, rather than a computational, exercise. Riverlane’s software aims to unleash the huge potential of quantum computers.”
Andrew Williamson, Managing Partner at CIC added, “Riverlane is changing the way we think about computation at the most fundamental level. Steve and his team are developing state-of-the-art algorithms that can run on a range of quantum computing hardware platforms. These algorithms can be applied to a number of applications such as drug–protein interactions, biomolecule folding and materials science at a molecular level. This is the sort of cutting-edge technology at which Cambridge excels and at CIC we are delighted to be involved with such an exciting company from the outset.”
Amelia Armour, Principal, Amadeus Capital Partners, said: “Amadeus has a long history of supporting deep tech businesses in Cambridge and we’ve been impressed by Riverlane’s progress. Steve has brought together an impressive team of experts in maths, computer science, chemistry, physics and materials science who share a passion for driving innovation in quantum computing. We’re pleased to support the company as it seeks to demonstrate the commercial value of its unique software.”
10 June 19. Pentagon Has Limited Clout on Raytheon-United Technologies Deal. Raytheon Co.’s planned merger with United Technologies Corp. is under Pentagon review even though military leaders won’t get to make the call on approving one of the biggest defense industry deals ever.
“Under Secretary Ellen Lord is engaging with industry leadership to understand the implications and governance as a result of this acquisition,” Lieutenant Colonel Mike Andrews, a department spokesman, said, referring to the Pentagon’s acquisition chief in a statement Monday.
The Pentagon will submit its views to the Justice Department or the Federal Trade Commission. The two antitrust regulators divide decisions on cases and haven’t indicated which will make the judgment this time.
Defensive Move
The United Technologies-Raytheon deal combines two top Pentagon contractors
Source: Defense Dept. data compiled by Bloomberg Government
The Defense Department looks forward to working with the combined company “to provide the best capabilities our warfighters deserve, at the greatest value to the taxpayer,” Andrews said.
In a first sign of opposition, Representative Ro Khanna, a member of the House Armed Services Committee, said he will seek a congressional hearing on the merger and its impact.
“This pending deal will likely raise prices, harm workers, stifle competition, and undermine innovation,” the California Democrat said in a statement. “We cannot have the taxpayers and our soldiers bear the cost for the profits of defense contractors.”
Shanahan’s Role
Acting Defense Secretary Patrick Shanahan may have a limited role in his department’s review because defense chiefs usually leave the crafting of the Pentagon’s advice to its chief weapons buyer and its industrial base professionals.
But Shanahan may be kept well-informed on the issues involved because Eric Chewning, his chief of staff, served as head of the Defense Department’s industrial base and mergers review office from October 2017 to January. Chewning oversaw reviews including Northrop Grumman Corp.’s purchase of Orbital ATK. The Senate Armed Services Committee may press Shanahan about the merger — and whether he should recuse himself from deliberations on it because of his past role as an executive with Boeing Co., a United Technologies customer — at his expected confirmation hearing for defense secretary.
Shanahan has recused himself from decisions on Boeing contracts, and the Pentagon’s inspector general cleared him of allegedly making inappropriate comments supportive of the Chicago-based planemaker.
The combined Raytheon Technologies Corp. would have about $70bn in sales and a product lineup from jet engines to missiles and cockpit electronics to cybersecurity services.
Lord, the Defense Department’s acquisitions chief, hasn’t issued broad policy statements on defense mergers, unlike some of her predecessors.
Top Suppliers
In 2011, Ashton Carter, who was then the chief weapons buyer and later became defense secretary, said the Pentagon would welcome U.S. defense company mergers, spinoffs and divestitures provided they didn’t involve the top five or six suppliers acquiring each other.
In 2015, the chief weapons buyer for the Pentagon under the Obama administration, Frank Kendall, was lukewarm toward Lockheed Martin Corp.’s acquisition of United Technologies’ Sikorsky unit, which the Justice Department approved that year.
Kendall said after the deal was approved that it “moves a high percentage of the market share for an entire line of products — military helicopters — into the largest defense prime contractor, a contractor that already holds a dominant position in high-performance aircraft due to the F-35 winner-take-all approach adopted over a decade ago.”
“Mergers such as this, combined with significant financial resources of the largest defense companies, strategically position the acquiring companies to dominate large parts of the defense industry,” he said.
After the Lockheed merger, Kendall argued to expand criteria for merger reviews by the Justice Department and the FTC to include an increased assessment of the national security impact beyond questions of economic concentration.
Warning that with “size comes power,” Kendall said the Pentagon would work with the Justice Department and Congress to preserve a diverse industrial base.
Trump’s Concerns
President Donald Trump expressed some concern about the latest merger on Monday morning.
“When I hear they’re merging, does that take away more competition?” Trump said in an interview on CNBC. “It’s hard to negotiate when you have two companies and sometimes only one bid.” Pressed on whether U.S. regulators would seek to block the deal, Trump said, “Only if they have the same products, that would be the thing that bothers me most. They have some overlap as I understand.”
Although United Technologies and Raytheon overlap in that they both make intelligence, surveillance gear and reconnaissance payloads for drones, there’s little other duplication, according to analysts.
While Trump “needs to look populist for his base, in reality he can be counted on to fall in line with business interests, except where trade is concerned,” said defense analyst Richard Aboulafia of the Teal Group.
Trump’s “unlikely to create a problem for this merger,” he said. “And since there’s no overlap, I don’t see any other regulators creating problems either.”
The Raytheon-United Technologies merger is set to close in the first half of 2020, after United Technologies completes the separation of its Otis elevator and Carrier air-conditioner businesses, the companies said in a statement Sunday. While billed as a merger of equals, current United Technologies shareholders will own most of the combined company, which is expected to be valued at well over $100bn, according to Bloomberg Intelligence. (Source: Defense News Early Bird/Bloomberg)
12 June 19. Bill Ackman comes out against UTC-Raytheon merger . Activist says aerospace mega-deal ‘makes no sense.’ Bill Ackman, whose hedge fund Pershing Square has a stake of more than $700m in United Technologies, has come out against the aerospace maker’s proposed merger with defence contractor Raytheon, saying the deal “makes no sense”. In an email to Gregory Hayes, UTC chief executive, Mr Ackman referred to Raytheon as “a large business of inferior quality” and said he “cannot comprehend the strategic logic behind such a transaction”. Pershing Square built its 0.7 per cent stake in UTC early in 2018, as Mr Hayes worked on a big restructuring plan for the industrial conglomerate. UTC said late last year that it would spin off its Otis elevator and Carrier building-systems businesses into separately traded companies — a move that was supported by Mr Ackman. The deal to bolt the remaining aerospace business together with Raytheon in a merger of equals would create an aerospace and defence powerhouse with estimated combined revenues of $74bn this year. Shares in UTC have fallen 7 per cent to $123 over the two trading sessions since the merger was announced. Raytheon’s stock price has declined by 4.5 per cent to $177. Mr Ackman made plain his opposition to the merger over the weekend, after news of the deal talks leaked and before the agreement was announced. “I hope that this is simply fake news,” he wrote in the email, “as it does not seem consistent with the Greg Hayes we know”. The activist had bet that UTC’s share price would get a significant uplift from its three-way split and predicted it could reach up to $200 by the middle of 2020. The Raytheon deal scrambles his calculations. “We are extremely concerned that such a transaction will significantly lower the business quality” of United Technologies’ aerospace business, he wrote, adding that the transaction “will be accomplished through the highly dilutive issuance of large amounts of United Technologies’ stock which is currently trading at an enormous discount to intrinsic value”. Recommended United Technologies Corp Big is beautiful for UTC and Raytheon in mega-deal While the deal makes “perfect sense for Raytheon shareholders”, Mr Ackman wrote, it would be “disastrous” for UTC. Mr Hayes and his counterpart at Raytheon, Tom Kennedy, have described the deal as a “win-win” for the companies and their customers, providing an unparalleled offering of technologies across commercial and military markets, as well as leverage over pricing. UTC said in a statement on Tuesday, after Mr Ackman’s opposition was first reported by the Wall Street Journal, that it was confident about the merits of the transaction “and the value it brings to them and the company”. (Source: FT.com)
11 June 19. AeroVironment, Inc. (NASDAQ: AVAV), a global leader in unmanned aircraft systems (UAS) for both defense and commercial applications, today announced it has acquired Pulse Aerospace, LLC, a developer and supplier of small VTOL UAS, for $25.7m in cash, including milestone-based earn-out payments of $5m. AeroVironment financed the transaction entirely from available cash on hand.
Pulse Aerospace is a leading developer of small VTOL UAS technology in the United States. Pulse’s HeliSynth™ technology brings flight control, payload, and endurance capabilities to market at attractive price points for both defense and commercial end markets. Pulse recently received a multi-year contract award with a maximum value of more than $13m from an undisclosed defense customer for its Vapor unmanned VTOL systems, spares and services. AeroVironment expects the transaction to be accretive to its earnings by the third full year of operations.
“The talented Pulse Aerospace team has created a solution set that is unique and will expand our family of unmanned systems by addressing increasing demand from our customers for small VTOL solutions,” said Wahid Nawabi, AeroVironment’s president and chief executive officer. “This transaction brings together two highly complementary companies in terms of products, markets and culture, and will better position AeroVironment to grow our share of the small UAS market. The team at Pulse Aerospace shares our focus on disruptive innovation and we welcome them to AeroVironment. Together, we will deliver even more capability to our customers in the United States and more than 45 allied countries around the world.”
“We are excited to join together to realize the full benefits of this transaction as we employ key, future-defining technologies such as robotics, sensors, software analytics and connectivity. Additionally, we look forward to gaining access to the strong technical talent pool in the Lawrence, Kansas area to help achieve our long-term growth objectives,” Nawabi added.
“AeroVironment’s global market presence dramatically increases the reach of Pulse’s VTOL UAS technology,” said Aaron Lessig, Pulse Aerospace, LLC’s chief executive officer. “Pulse’s offering expands AeroVironment’s mission capabilities with increased payload capacity, which broadens customer use cases. We look forward to growing AeroVironment’s share of the global unmanned systems market together.”
In connection with the transaction, Pulse Aerospace’s Lawrence, Kansas facility will become AeroVironment Innovation Center – Midwest, with a focus on small VTOL unmanned aircraft and mission planning solutions.
10 June 19. Hanwha Aerospace to acquire EDAC Technologies for $300m. South Korean aviation firm Hanwha Aerospace said on June 10 that it will take over the entire stake of US aircraft engine manufacturer EDAC Technologies from Greenbriar Equity Group for 351.6bn won ($297.2m). The acquisition will be complete by end-2019, on the premise of approval from the respective government agencies in Korea and the United States, read a disclosure on the day. The aviation unit of Korean conglomerate Hanwha Group will acquire 100 percent of EDAC Technologies following its merger with a special purpose company founded by the conglomerate on June 5, according to the disclosure. EDAC Technologies is a Connecticut-based precision component maker for aircraft engines and airframes founded in 1946. Its clients include Pratt & Whitney, General Electric and Rolls-Royce. Hanwha Aerospace, formerly Samsung Techwin and owned by Samsung Group, was acquired by Hanwha in 2014. Now, Hanwha’s holding firm Hanwha Corp. owns 33.03 percent share of the Korean aircraft engine maker. Focusing on aviation and the defense industry, Changwon-based Hanwha Aerospace had seen its revenue nearly double over four years from 2.6trn won in 2015 to 4.5trn won by end-2018. Its capital came to 2.6trn won as of end-2018. (Source: http://www.theinvestor.co.kr)
11 June 19. Big is beautiful for UTC and Raytheon in mega deal. Analysts question whether likes of Boeing will baulk at increased scale of new group. Greg Hayes was a busy man last summer. The chief executive of United Technologies was finalising a $30bn acquisition of the avionics specialist Rockwell Collins while also plotting a break up of his US industrial conglomerate by spinning off other businesses. Then he received a call. On the phone was Tom Kennedy, his counterpart at Raytheon, the defence group and one of the top five prime contractors to the Pentagon. Would he consider a merger between Raytheon and the aerospace businesses of UTC? The timing was not ideal but the proposal was. “This had been on our radar screen . . . for a decade or more,” said Mr Hayes on Monday, just hours after he unveiled the result of his third bold move — an all-share merger with Raytheon.
“It was like looking at Raytheon in a mirror,” chorused Mr Kennedy, explaining the rationale behind that initial telephone call. The two companies had similar business structures and complementary technological capabilities. The combined company, to be called Raytheon Technologies, will be one of the aerospace and defence industry’s giants, becoming the third largest in the world after Boeing and Airbus. It will have a slight bias towards defence, with some 54 per cent of 2018 pro forma sales of $69bn, and an almost equal geographic split between the US and the rest of the world. It will bring together Raytheon’s military expertise and flagship products such as the Patriot missile system and Tomahawk cruise missiles with UTC’s Collins Aerospace, a maker of cockpit avionics, and the aero-engine group Pratt & Whitney.
The president ‘understands the benefits of this merger in terms of what it’s going to do to reduce costs to the government . . . I think he’s going to be supportive, as he has been for our companies over his administration’ Greg Hayes, UTC chief executive Both Mr Hayes and Mr Kennedy on Monday said the deal was a “win-win” for the companies and their customers, providing an unparalleled offering of technologies across commercial and military markets, as well as leverage over pricing. Crucially, it would be able to invest “through the business cycles”, a comment many took to be a nod towards an expected softening of the commercial aerospace market and a possible slowdown in defence spending over the next year. The combined company will employ 60,000 engineers and have enough financial firepower to invest $8bn a year in research and development, seen as critical at a time when the US Department of Defense had made modernisation a priority.
The absence of product overlap, the companies said, should avoid any substantial regulatory concerns. America’s defence industry has been concentrated on five prime contractors over the past two decades including Raytheon, but not UTC. Speaking on Sunday after the deal was announced, Mr Hayes told the Financial Times that the merger would use “technologies from one side to benefit the other’s companies”. Using Raytheon’s cyber security systems to protect civil aircraft was one important potential growth market, Mr Hayes said. The deal failed to excite the markets and investors, despite the promise of a return of $18bn-$20bn in the first three years after the merger, through dividends and share buybacks. The companies also promised synergies of at least $1bn a year from cost savings.
Shares in UTC fell just over 2 per cent to $129 on Monday while Raytheon stock was up 1.7 per cent at $189 in early morning, coinciding with remarks by President Donald Trump suggesting the merger could be bad for competition. Speaking to CNBC television after Mr Trump, Mr Hayes insisted that once the president “understands the benefits of this merger in terms of what it’s going to do to reduce costs to the government, improve technology of the US and its defence profile and what it’s going to do for jobs in this country, I think he’s going to be supportive, as he has been for our companies over his administration”. Mr Hayes said he planned to discuss the merger with Mr Trump on Monday. Rob Stallard at Vertical Research Partners questioned the rationale of the deal for Raytheon, noting that the defence group “does not ‘need’ to merge with anyone”. Of the $26bn expected debt of the combined company, $24bn will come from UTC. “Its defence-focused businesses continue to see solid growth, and it could have chosen to use its under-levered balance sheet to step-up capital returns,” he said.
Execution risk is a big concern. UTC said it hoped to close the deal in the first half of next year following the spin-off of Otis elevator and Carrier building-systems businesses into separate units. The merger, said Cai von Rumohr of Cowen, “adds complexity to an already complicated set of transactions being handled by UTC’s financial staff”. Analysts at Agency Partners said the deal “sends remarkably bearish signals from the respective managements about both defence and civil aerospace cycles”, adding that given the absence of significant overlap, “it is hard to avoid the conclusion that this deal is about size for size sake”.
Recommended Lex: premium commentary UTC/Raytheon: categorically broader Nigel Coe of Wolfe Research added the “principal concern is that management has a lot of balls in the air”, adding that “there is quite a mixture of cultures within the pro forma company and here we note that Goodrich, BE Aerospace and Rockwell Collins (and now Raytheon) were standalone public companies and have all been acquired in the past seven years”. Mr Hayes insists that “from a UTC perspective, we have never lost our focus on operations”. Analyst Seth Seifman of JPMorgan predicted that the merged company will deliver “moderate” synergies. But there could also be opposition from customers with analysts questioning whether the likes of Boeing will baulk at the increased scale of the merged group, particularly given that it has in recent years pushed hard to reduce supplier costs. “Our interests are in adding value to our customers and in ensuring the long-term health and competitiveness of the aerospace industry and of our supply chain,” Boeing said in a statement on Sunday in what could foreshadow tensions between the aircraft manufacturer and the industry’s new powerhouse. (Source: FT.com)
10 June 19. Why the new Raytheon Technologies will eschew platforms for new technology development. “Platform agnostic.” It’s a term getting a lot of play from United Technologies CEO Greg Hayes and Raytheon CEO Tom Kennedy, in the wake of this weekend’s surprise announcement that the two companies would be merging into a new firm, known as Raytheon Technologies Corporation.
Neither company works as a platform producer, eschewing the production of aircraft or ground vehicles and instead focusing on the technology that makes them work. It’s a business model that has produced well for both firms, and in a Monday interview with Defense News, the two CEOs made it clear they see no need to deviate now.
“One of the first and foremost things we absolutely agree on is, we want to be platform agnostic,” Hayes said, noting that UTC sold off its Sikorsky helicopter unit almost five years ago because “we didn’t like the programmatic risk associated with platforms.”
“We’ll supply all the content and all the systems, all of the offensive, defensive capabilities necessary to make the system successful, but we really think it’s important that we remain agnostic among the platform providers,” Hayes added.
Said Kennedy, “Neither of us essentially develop platforms or sell platforms. Why that’s important is, really, the amount of capital that you have to go and spend in maintaining and creating these platforms kind of takes your eye off the ball relative to investing in technology moving forward. So that was a big feature, that both companies are platform agnostic.”
Instead, both men said the new firm will remains focused on developing high-end technologies which can be inserted on, or in, platforms developed by the other major defense primes. With that goal in mind, the company is preparing to spend $8bn in R&D funds in the year following its merger.
When the merger is completed in early 2020, Kennedy will become chairman of the board, with Hayes serving as CEO. Two years later, Kennedy will step down, with Hayes adding the chairman title.
One area Kennedy highlighted as having good synergies is hypersonic weapons, a major interest for the Pentagon. Raytheon has already been working on hypersonic missiles, including the guidance and control systems, but UTC’s experience with propulsion and materials science might be able to help deal with a specific challenge for Raytheon’s weapon designers.
“It just turns out when you’re flying at Mach 5, you really increase your temperature on all your surfaces,” Kennedy said. “If you have a propulsion system, the air is coming in at such a high speed, that creates a significant amount of heat; it has to be dissipated in a very efficient way,” Kennedy said. “And one of the areas that the United Technologies has, really based in the Pratt & Whitney guys, is all the technology that they’ve developed over the years in working very high temperatures internal to their turbine engines,” he continued. “So not only do they have, I would call it the heat management capabilities, but also the material science to go implement those.”
Hayes identified two areas where shared R&D will have a near-term impact, and they underline the benefit of having a new company that will be roughly 50-50 defense and non-defense business.
The first is on aircraft control systems, where each company has technologies that can be brought to bear for the FAA’s next-generation air traffic control networks. The second comes in the form of cybersecurity.
“I think Raytheon is second to none as it relates to cyber, and we view this as a core competency that can benefit the entire commercial aerospace ecosystem,” Hayes said. “Not just the connected aircraft, which is probably the first order of business, but the whole ecosystem. How do you protect passenger data, how do you protect the equipment that’s on the ground? How do you protect the airplane while it’s flying?
“I think we’ll see that shortly in the marketplace.” (Source: Reuters)
10 June 19. Pentagon in talks with industry on United Technologies and Raytheon merger – statement. Pentagon leadership is engaging with industry leadership to understand the implications of the United Technologies Corp merger with Raytheon Co, a Pentagon official said on Monday.
“Under Secretary of Defense for Acquisition and Sustainment Ellen Lord is engaging with industry leadership to understand the implications and governance as a result of this acquisition,” the statement said. Lord is the chief weapons buyer for the Pentagon.
The $121bn (£95bn) deal, announced on Sunday and expected to close in the first half of 2020, would potentially upend the aerospace sector, creating a conglomerate spanning commercial aviation and defence procurement. The Pentagon would be one of the new company’s largest customers. (Source: Reuters)
10 June 19. United Technologies expects regulatory approvals by early 2020 for Raytheon deal. United Technologies Corp said on Monday it expects to secure regulatory approval by the first quarter of 2020 to combine its aerospace business with U.S. contractor Raytheon Co and create a new company worth about $121bn.
“I think from a regulatory standpoint, the beauty of this deal is there’s very little overlap…But really less than 10 jurisdictions have to approve this. We don’t have to go to China. We truly believe that we’re going to get this done relatively quickly,” Gregory Hayes, chief executive officer, United Technologies, said in a call with analysts.(Source: Reuters)
10 June 19. Donald Trump questions United Technologies-Raytheon merger. US president queries whether deal would decrease competition in defence sector. US President Donald Trump has waded into the planned merger of United Technologies and Raytheon, suggesting the deal that would create an aerospace and defence giant could be bad for competition in the sector. Under the deal, which was agreed on Sunday, UTC is set to merge its aerospace business with Raytheon to form a $120bn powerhouse and the second-largest defence contractor by revenue. But Mr Trump said on Monday it could decrease competition in a sector in which a small number of companies command strong pricing power. “When I hear United and I hear Raytheon . . . when I hear they are merging, does that take away more competition?”
Mr Trump asked in an interview on CNBC. The comments by Mr Trump echo his previous intervention on AT&T’s takeover of Time Warner and could prepare the ground for Raytheon and United to claim improper political interference if antitrust enforcers attempt to block the deal. In the case of AT&T-Time Warner, the spectre of the president’s vow to block the deal on the campaign trail hung over Makan Delrahim, the antitrust chief of the Department of Justice, when he sued to block the transaction. A federal judge cleared the deal in a decision affirmed on appeal. Mr Delrahim has always denied any political considerations played a part in his move to block the takeover. Mr Trump on Monday said a merged Raytheon-United Technologies would be “one big, fat, beautiful company” that could result in higher costs for the US military. “I have to negotiate — meaning the United States has to buy things — and does that make it less competitive? Because it’s already non-competitive,” he said. The president added that the US already spent far more than “other major countries” such as China and Russia on its defence budget, insisting “part of it is that we have no competition”.
Earlier in the day, both chief executives of the merging companies had told analysts on a conference call that the deal will not harm competition or raise regulatory hurdles. Mr Trump has gone further than past presidents in his willingness to entangle himself in corporate matters and to openly criticise specific companies by name on a range of issues from trade to free speech and antitrust. He has taken aim at Google and other Silicon Valley firms for allegedly discriminating against conservatives, which the firms have denied, adding weight to the political pressure on the justice department and the Federal Trade Commission to put technology giants under tougher scrutiny. The agencies have recently taken steps towards launching antitrust probes of Google, Facebook, Apple and Amazon. The Raytheon-United Technologies deal will be reviewed on antitrust grounds by either the DoJ or the FTC, which share responsibility for assessing whether mergers are anti-competitive. While both are led by appointees of Mr Trump, the FTC is an independent agency designed to have greater insulation from the administration. Greg Hayes, UTC chairman and chief executive, said he didn’t see “big push back” from the US department of defence, which he predicted would reap “huge benefits” from the deal. “From a regulatory standpoint, the beauty of this deal is there’s very little overlap.
You’re talking on the basis of $75bn or $80bn of sales, less than 1 per cent of our sales probably have overlap. This is truly a complementary deal from a technology standpoint or from product standpoint,” he told analysts. “Less than 10 jurisdictions have to approve this,” he added, noting that the deal will not require the approval of the Chinese government to proceed. UTC’s acquisition of avionics specialist Rockwell Collins, announced in September 2017, did not close until November 2018 after Chinese authorities delayed a decision as trade tensions with the US grew. “We truly believe that we’re going to get this done relatively quickly. Our goal right now is to have a regulatory approval by the first quarter of next year,” he said. Richard Aboulafia, aerospace and defence analyst at Teal group, predicts that the deal will provoke little regulatory scrutiny. “Since there’s no overlap, I don’t know what the grounds would be for DOD objection. And Trump might signal concern for his populist base, but given his strong pro-business approach, it’s really just smoke,” he said. UTC shares fell 2 per cent after the New York open, which coincided with the release of Mr Trump’s comments. Raytheon shares were up 2 per cent after the open. (Source: FT.com)