M&A activity in the Aerospace and Defence sector busiest in 30 years

Canadian deal takes centre stage: PwC report

MONTREAL, May 19 /CNW/ - Merger and acquisition (M&A) activity in the Canadian aerospace & defence (A&D) sector exceeded expectations in the first quarter of 2011 with the pace of activity rising significantly this quarter compared to 2008-2010 levels. Globally, it was the highest first quarter total for announced deals the global A&D sector has seen in more than 30 years, according to a new PwC deals report.

Q1 saw the announced acquisition of Canada's Vector Aerospace by Eurocopter, a subsidiary of EADS, for US$611 million—the largest Canadian deal in the A&D space in more than three years. There have been no deals of this magnitude in the Canadian A&D sector since the fourth quarter of 2007 when Sweden's Hexagon AB acquired Canada's Novatel for US$430 million.

A global PwC report shows the first quarter also saw a resurgence of large deals in the global A&D sector. In Q1 2011, there were 17 deals with values more than US$50 million amounting to US$9.5 billion, compared to just 10 deals worth a total of US$5.7 billion in Q1 2010. This is a 67% increase in global deal value and 70% rise in deal volume year-over-year. There were also six "mega deals" (transactions more than US$250 million) in Q1 globally, an increase from five for the same period in 2010.

"The big deals were back in the first quarter globally, with the acquisition of Canada's Vector Aerospace taking third place honours," says Mario Longpré, national aerospace and defence leader, PwC.

With the cyclical nature of transactions in the A&D sector, Canada is tracking ahead when compared to the previous economic recovery cycle from 2002-2005. During that time period, transactions in the Canadian A&D sector averaged US$834 million per year on an average of just under two transactions per year. This compares to the global averages of US$15.5 billion and just under 31 transactions per year. For 2011, we expect a reversion to the mean in terms of the number of deals and average value of transactions as the global economy continues to rebound and more companies, both within and outside of Canada, resume the search for growth prospects in the A&D sector.

The outlook looks positive for increased deal activity in the Canadian A&D sector pending potential risks associated with the strong Canadian dollar and rising fuel prices. So far, the second quarter has provided an additional lift as Canadian Helicopters Group acquired New Zealand's Helicopters Pty Ltd last month for about $125 million.

PwC expects four key themes for the Canadian A&D sector for the remainder of 2011:

    1)      Increased defence deal-making: Canadian defence spending has traditionally not been a key driver for the Canadian A&D sector. However, according to Longpré, "the recent Conservative majority win bodes well for military programs such as the F-35 Joint Strike Fighter and military helicopters. Deal-making among small-to-medium size players to achieve scale ahead of expected subsector strengthening may be on the horizon."
    2)      Fuel prices and strong Canadian dollar to affect A&D: Oil price volatility in 2010-2011 combined with geopolitical uncertainty in the Middle East impedes OEMs and suppliers from forecasting volumes and planning for production. As such, we expect many firms to adopt a "wait and see" approach to M&A until oil prices stabilize. Similarly, the rising Canadian dollar relative to the US dollar and the Euro—the two major end-markets for Canadian products—may impact deal valuation on the sell side. On the flip side, a strong dollar also puts Canadian A&D firms in a better position to buy abroad.
    3)      M&A as a tool to achieve scale: As OEMs continue to reduce the number of suppliers they work with; more small-to-medium size A&D players may merge to demonstrate sufficient scale. Also, further consolidation may be spurred by new demand from high-growth markets such as China and India.
    4)      Deals to rise in MRO subsector: PwC expects firms in the maintenance, repair and overhaul (MRO) sector to be attractive targets for M&A. Large OEMs may acquire pure-play MRO firms as part of an industry-wide trend of moving towards a "lease and service" business model, rather than an "outright sale" business model. "This could be positive for Canada where a cluster of MRO firms generate more than $3 billion in annual revenues," says Longpré. "The recent acquisition of Vector Aerospace by EADS is a case in point."

For a copy of Mission Control, PwC's quarterly analysis of M&A activity in the global A&D sector, visit: www.pwc.com/ca/aerospace-defence

About PwC's Deal Team
PwC's Deal Team (www.pwc.com/ca/deals) helps clients to achieve deal success—from concept to close and beyond. As part of the world's largest Transaction Advisory practice , and with our global Corporate Finance group being 2010 Upper Mid Market M&A Advisor of the Year , the PwC Canada Deals Team is your gateway to an exciting new world of emerging M&A opportunities.

Firm Description
PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information. In Canada, PricewaterhouseCoopers LLP (www.pwc.com/ca) and its related entities have more than 5,800 partners and staff in offices across the country.

"PwC" is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.

Note to Editors: PwC has changed its name from PricewaterhouseCoopers to PwC in the fall of 2010. 'PwC' is written in text with a capital 'P' and capital 'C'. Only when you use the PwC logo is the name represented in lower case.

"PwC" refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.






For further information:

Jessica Draker, PwC
Tel: 613 755 8706
email: jessica.l.draker@ca.pwc.com 


Kiran Chauhan, PwC
Tel: 416 947 8983
email: kiran.chauhan@ca.pwc.com

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