Analysis: Aerospace M&A likely to get boost from U.S. budget deal

Tue Dec 17, 2013 3:37pm EST
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By Andrea Shalal-Esa and Brenda Goh

WASHINGTON/LONDON (Reuters) - A U.S. budget agreement making its way through Congress could set off the most robust series of mergers and acquisitions in the aerospace and defense sectors in years, industry leaders and experts say.

The two-year agreement, which is likely to pass the Senate this week, is expected to reassure contractors on government spending and unleash pent-up demand for deals, according to analysts. The House of Representatives approved the budget plan last week.

The budget deal would halve the $52 billion in automatic spending cuts facing the Pentagon in fiscal 2014 and would lower mandatory reductions in projected spending in 2015.

"It gives our customers in the U.S. government further certainty for their budget decisions," Marillyn Hewson, chief executive of Lockheed Martin Corp (LMT.N: Quote), said in an interview with Reuters.

"It does give us more certainty and helps us in our planning process," she said, noting that the company is always looking for acquisitions to tap new markets or round out existing business areas.

Defense M&A activity ground to a near halt in recent years amid uncertainty about future U.S. military spending that has kept sellers on edge and buyers more apt to invest in share buybacks and dividend payouts than acquisitions. Boeing on Monday announced a $10 billion buyback and increased its dividend 50 percent, part of a broader share-buying spree by large U.S. companies.

Now, however, the industry is poised to hit a three-year high in both the number and value of deals next year as shrinking defense budgets and a surge in commercial aircraft orders prompt consolidation in supply chains for both sectors, said Tom Captain, head of aerospace and defense at consulting firm Deloitte.

"2014 should be a banner year for aerospace and defense M&A activity," Captain said in an interview. "There will be a great number of smaller deals, no blockbusters, but deal value should also be up."   Continued...

Three F-35 Joint Strike Fighters (rear to front) AF-2, AF-3 and AF-4, fly over Edwards Air Force Base, December 10, 2011. REUTERS/Lockheed Martin/Darin Russell