Defense and aerospace merger activity sees 'soft start' to 2017
Defense and aerospace industry mergers slowed in the first three months of the year compared with the fourth quarter but activity should pick up for the remainder of 2017, predicts a new report.

Aerospace and defense industry deal value reached $13.8 billion in the first quarter of 2017, representing a decline of about 20 percent compared with about $17.1 billion in M&A activity in the fourth quarter, according to a report released Thursday by PricewaterhouseCoopers, the accounting and consulting services firm.

"Despite a relatively soft start to the year, we are optimistic that deal activity will recover and return to prior year levels," the PwC report said. "Defense spending increases and geopolitical factors will certainly play a part in the prevalence and magnitude of dealmaking through the rest of 2017."

Scott Thompson, national leader of PwC's aerospace and defense practice, said the 10-year pace of the industry is for M&A dollar volume of around $25 billion annually. "We will probably continue at a pace which is above the 10-year average," he said, adding that such a scenario would mean there's still probably about "$18 billion or more" worth of new deals still to come by year's end.

Besides greater defense spending, PwC sees increased deliveries of large commercial aircraft helping to boost M&A volumes as the year progresses, too.

According to Thompson, the commercial aircraft segment is "a very, very attractive place to be" given strong passenger growth by the global airline industry. That has resulted in more carriers replacing their aging fleets of jets or in ordering new planes to expand service.

Overall, there were 10 M&A deals in aerospace and defense in the first quarter, down 47 percent from 19 in the fourth quarter of 2016. The report also said strategic investors continued to lead the deal activity and contributed about 90 percent of transaction volumes and 95 percent of deal value in the quarter.

One deal in the first quarter — the $9.4 billion merger of French jet engine maker Safran with seats manufacturer Zodiac Aerospace — represented 68 percent of the quarter's total deal volume. The merged company will create the world's third-largest aerospace supplier in terms of revenue.

The second-largest deal in the quarter was the announced $2.1 billion merger of Canadian satellite company MacDonald, Dettwiler and Associates with DigitalGlobe , a Colorado-based satellite imaging company.

North American deals represented 69 percent of the M&A volume in the first quarter but deal value for both North America and the Asia-Oceania region were substantially below the fourth quarter of 2016.

The aircraft and parts category was the top M&A area in terms of deal value, accounting for 70 percent of total transaction value and 30 percent of transactions in the first quarter.

Indeed, while the bulk of the money for aircraft orders flows to OEMs (or original equipment manufacturers) such as Boeing and Airbus , the other beneficiaries are parts suppliers, which includes suppliers of everything from engines and landing gear to cargo doors and seats.

"We have seen OEMs put more margin pressure on the supply base," said Thompson. "So there is some reasonable impetus for the supply base to consolidate some to gain a little bit greater leverage on the margin side."

Finally, the rush of big deals in the government services category of aerospace and defense slowed in the latest quarter but it followed large transactions last year, including U.S. defense giant Lockheed Martin jettisoning its information technology and services businesses in a $4.6 billion deal with Leidos .

"Everybody who is in government services has either done an acquisition or been acquired pretty much," said Thompson.