Aviation Week & Space Technology - 30 March-12 April 2015

Going Concerns

COMMENTARY

Just days before,

Alcoa closed on

its acquisition of

Germany-based

titanium casting

company Tital.

That deal—which

delivered contracts

with the Airbus

Group, Safran’s

Snecma and Rolls-

Royce—would have

been noteworthy

alone, except it

was overshadowed

by Alcoa’s $2.85

billion acquisition

in November of the

parent company

of Firth Rixson, a

leading provider of

rings and forgings

for aircraft engines.

While details

of the Tital deal

were not disclosed,

the others totaled

$4.35 billion. What could spur Alcoa, the

No. 3 producer of aluminum, to pony

up maybe $5 billion in less than a year?

Aerospace and defense market share.

When it announced the Firth acquisition,

Alcoa described it as a major accelera-

tion in its big shift toward A&D. Before

the deal, Firth claimed the No. 1 global

position in seamless rolled jet engine

rings, which are engineered from nickel-

based superalloys and titanium. RTI

brings even more “scale,” or heft. Based

on pro-forma 2014 estimates, adding RTI

to Alcoa boosts the latter’s aerospace

revenue to 13% of total sales.

P

lease welcome the major midtiers.

On March 9, metals giant Alcoa said it will buy RTI Inter-

national Metals, a global supplier of titanium and specialty met-

als and services for the commercial aerospace, defense, energy

and medical device markets, in a stock deal worth $1.5 billion.

Majors in the Middle

As industry consolidates, large providers under

the primes and OEMs are crystallizing

While some Wall Street analysts

grumble that Alcoa paid richly for RTI—

about a 50% premium to its closing price

March 6—none appear to doubt the

strategic reasons for bulking up in A&D.

For starters, there is the nine-year back-

log of airliner orders at Airbus and Boe-

ing, as well as the potential for defense

budgets to start rising in the West.

Then in September, Alcoa and

Boeing announced the largest supply

contract in their 35-year history. Details

were not provided, but Alcoa said the

“multi-year” deal is “valued at more

than $1 billion” and makes it the wing-

skin supplier to Boeing for its metallic

structure airplanes.

Indeed, the positive sentiment is also

buoying a key Alcoa rival, Precision

Castparts (PCP), which likewise has

been on an acquisition binge to build

market share (AW&ST May 12, 2014,

p. 20). Despite their buying sprees, RBC

and others see room for both.

“PCP has long competed with Alcoa

in forgings, castings and fasteners,

and we’d say that PCP’s market share

in these areas has improved over time

versus Alcoa,” RBC Capital Markets

said in January. “Although RTI-

sourced titanium could help Alcoa’s

costs in certain products, Alcoa still

lacks internal nickel supply and inter-

nal titanium sponge supply.”

To be sure, PCP is sufering a bit of a

dip in its share price due to destocking

of excess inventory by major customer

Rolls, as well as the hit it is taking in its

oil and gas units due to a roughly 50%

collapse in oil prices. Analysts think

that with the market share roll-up, PCP

remains a good long-term bet.

That is, in part, because of the rise of

dominant midtiers across A&D. Spurred

by airliner backlogs and the Pentagon’s

moratorium on prime contractors

combining, mid-industry providers have

been all but formally encouraged to bulk

up by merging or acquiring others. It

further helps that borrowing costs are

at historic lows, while many companies

have amassed cash piles and/or high

stock prices, another proxy tool in merg-

ers and acquisitions.

Recent examples include the SAIC-

Scitor tie-up in services, Orbital-ATK

in space, Harris and Exelis in electron-

ics and even Textron and Beechcraft in

business jets. The Harris acquisition of

Exelis, for instance, catapults it behind

just L-3 Communications in revenue

generation (see graph).

While analysts fret that the rise of

major midtiers could threaten primes’

and OEMs’ power to hold down prices

from their providers, and thus their

financial performance, such days still

seem far away. Boeing remains efusive

over the ability of its Partnering for

Success project to squeeze the sup-

ply chain, and midtier consolidation

appears an ever-more popular means

to squeeze reliability out of the supply

base in the near term. c

AviationWeek.com/awst AVIATION WEEK & SPACE TECHNOLOGY/MARCH 30-APRIL 12, 2015 19

By Michael Bruno

Senior Business Editor

Michael Bruno blogs at:

AviationWeek.com/ares

[email protected]

Primes Tier 2

46

31 31

24 24 23

12

(^87)
(^555554)
33
Major Middles Emerge: 2014 Revenues $billions

• Pre-Scitor aquisition
  (2) Excludes commercial aerospace
  (3) LTM as of last public fling Source: Public security flings, and Harris
  LMT = Lockheed Martin
  BA = Boeing
  GD = General Dynamics
  BAE = BAE Systems
  NOC = Northrop Grumman
  RTN = Raytheon
  LLL = L-3 Communications
  Harris PF = Harris + Exelis
  HII = Huntington Ingalls Industries
  LDOS = Leidos
  BAH = Booz Allen Hamilton
  COL = Rockwell Collins
  ATK/ORB = Orbital ATK
  Harris = standalone Harris
  SAIC = Science Applications International Corp
  CACI = CACI International
  Exelis = standalone Exelis
  Company Ticker Translations: