December 2005 Grant Thornton Corporate Finance mergers & acquisitions Aerospace Components M&A update Aerospace Components: • Industry drivers Structural factors, strong demand and • M&A Activity private equity investments drive mergers • Valuation benchmarks and acquisitions • Private equity The Aerospace Component sector is seeing a significant increase in merger and acquisition activity fueled by: • private equity interest in the sector; • benefits of consolidation in a fragmented industry; • suppliers facing increasingly demanding customers; • private business owners approaching retirement age; and • buoyant orders for aircraft and parts. Grant Thornton Corporate Finance Industry drivers Mergers & Acquisitions Strong demand is being seen in the U.S. To simplify their supply base and Aerospace Components sector: control costs, OEMs and their tier one Industrials Group suppliers are shifting preferences • Net new orders are expected to show a towards manufacturers delivering Ian Cookson 20% increase for 2005. AIA reports entire systems and sub-assemblies as that the sector is on pace for almost opposed to individual components. Director $200 billion in net new orders for the This is encouraging suppliers to P: 617.848.4982 year, compared with $165 billion in respond through consolidation and E: Ian.Cookson@gt.com 2004. 1 providing additional value-added out- • The backlog of unfilled orders sourcing. Benjamin Gerwin supports continued strong demand Associate into 2006, with almost $230 billion in Many owners of component unfilled aerospace orders at the end of manufacturers are reaching retirement P: 617.848.4873 the first half of 2005. 2 age and are looking to monetize E: Benjamin.Gerwin@gt.com ownership: • Higher fuel costs are driving demand for more efficient, newer commercial • private equity has proven an active 226 Causeway Street buyer in the industry; and aircraft models. Boston, MA 02114 • Military spending has expanded, • transitioning ownership through the www.GrantThornton.com accounting for over 60% of aircraft use of external capital is more likely to spending in 2004 compared with less increase value for departing than 50% in 2000. 3 shareholders. December 2005 2 M&A activity M&A activity within the Aerospace • Strategic buyers continue to seek • creating more substantial businesses Components sub-sector has picked up acquisitions that bring: proprietary better able to support capital considerably. (Table One illustrates 15 technologies; achieve scale; and expenditure needs; and representative aerospace component enhance component offerings. • providing valuation multiple expansion transactions that have occurred since Q1 Sector consolidation through M&A through increased scale. 2004): activity can provide tangible benefits for • Private equity players have become components suppliers through: The components sector is highly major participants in the sector and fragmented – around 1,500 companies • driving improvements in design and account for roughly half of the with combined annual revenue of $45 manufacturing processes to enhance transactions taking place. Over the billion support major OEMs.2 The innovation and create production past eighteen months, they have typical aircraft parts company has efficiencies; completed numerous stand-alone revenue of $25 million and 150 acquisitions of components • reducing customer concentration; employees. manufacturers. Table One: Recent Aerospace Components Transactions Source: Company filings, press releases Grant Thornton, LLP December 2005 3 Valuation benchmarks In 2005, acquisitions less than $25 million • exceptional customer position; and • More specialized technology and in size took place at an average multiple systems providers support higher • significant size. of 5.8x EBITDA (across all sectors). This market valuations between 9.0x - 11.0x compares with a higher multiple of 8.5x Public Company Trading Comparables EBITDA. EBITDA for larger transactions As with private company transactions, • Company size is an additional factor (between $25 million and $250 million) .4 public market aerospace component contributing to a difference in trading Although terms of smaller private supplier valuations tend to increase in valuations. aerospace component company line with the sophistication of a transactions tend not to be disclosed, company's offerings. Generally, the • With improved earnings, not only have higher multiples are paid for businesses more precision and advanced technology absolute valuations increased, but with: required for a particular component, the trading multiples have risen as well. greater the trading valuation: Public company enterprise value • proprietary technology & design; market multiples for the sector have • rapidly growing aftermarket business; risen since 2001 from around 5.6x EBITDA to over 9.0x EBITDA. Table Two - Aerospace Component Public Trading Multiples Private equity Private equity players are being attracted to the sector by the prospect of pursuing a buy and build strategy, thereby: • capturing the benefits of consolidation; and • gaining price multiple expansion from subsequent demand among strategic buyers for businesses of significant size. > Source: Capital IQ as of December 2005 Grant Thornton, LLP December 2005 4 Conclusion Consequently, private equity is proving an The combination of: lengthening backlogs; attractive alternative source of additional strong availability of capital; an aging buyers, providing sellers a greater shareholder base; and increasing demands by opportunity to maximize value – particularly OEMs should ensure continued M&A for those businesses which may not be activity among aerospace component critical acquisitions for strategic buyers. manufacturers. Private equity has become a useful source of capital for owners seeking to • The private equity community has maximize value or to embark on acquisition substantial capital seeking investment strategies. (around $100 billion) and debt availability is high. Footnotes 1: AIA Update October 2005 • The private equity market is itself highly fragmented – providing business owners a 2: First Research Aircraft Parts Manufacture Industry Profile significant challenge to identify the right partner. 3: U.S. Dept. of Commerce; Department of Defense; General Aviation • Private equity transactions can prove Manufacturers Association; AIA highly favorable for ongoing management, 4: Thomson Financial U.S. M&A providing management teams with the Transactions opportunity for significant ownership and independence going forward. About Grant Thornton Corporate Finance LLC About Grant Thornton LLP Grant Thornton Corporate Finance LLC provides investment banking Grant Thornton LLP is the U.S. member firm of Grant Thornton and ownership consulting services to middle-market companies in the International, one of the six global accounting, tax and business United States and around the world. For additional information or to advisory organizations. Through member firms in 110 countries, discuss: ownership transition issues; acquisitions, divestitures and including 50 offices in the United States, the partners and employees capital raising strategies; or how transaction planning can help to of Grant Thornton member firms provide personalized attention and increase business value, please feel free to contact Ian Cookson on the highest quality service to public and private clients around the 617.848.4982 or by email at email@example.com. globe. Visit Grant Thornton LLP at www.GrantThornton.com. The factual statements contained herein are taken from sources Grant Thornton LLP offers investment banking services through its believed to be reliable, but such statements are made without any wholly owned broker-dealer subsidiary Grant Thornton Corporate representation as to accuracy or completeness or otherwise. Grant Finance LLC. Thornton Corporate Finance LLC does not engage in the business of recommending or effecting transactions in securities. The above information is presented solely in connection with describing Grant Thornton Corporate Finance LLC's mergers and acquisitions services, and should not be considered as constituting a research report or as providing information reasonably sufficient upon which to base an investment decision.
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