Flight International - August 18, 2015

THIS WEEK

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SUPPLY CHAIN DAN THISDELL LONDON

Industry health gauged with Precision

Takeover of components maker by Berkshire Hathaway part of renewed impetus for aerospace mergers and acquisitions

T

he blockbuster $37.2 billion
takeover of components
maker Precision Castparts by
Warren Buffett’s Berkshire Hatha-
way group has the aerospace and
defence industries on course for a
record year of mergers & acquisi-
tions (M&A) activity – but even
without that “extraordinarily
unique” deal, 2015 is set to be a
“banner year” for company
wheeling and dealing.
And, adds Scott Thompson,
leader of consultancy PwC’s USA
aerospace and defence assurance
practice, next year looks likely to
continue the rising trend of dollar
value M&A activity from the
trough of 2013.
M&A activity is an important
signal of the health of an indus-
try, because it shows that buyers
and sellers both see attractive
prices – meaning buyers perceive
good growth prospects and sell-
ers can refocus portfolios or exit
investments at a profit. And, the
interest of financial investors like
Buffett – noted for holding com-
panies rather than buying and
selling quickly to make trading
profits – shows confidence in the
long-term prospects.
Thompson was speaking on
the back of new PwC figures
that show the first half of 2015
to have been marked by $12.
billion spent on 19 aerospace or
defence deals worth more than
$50 million, prior to the Preci-
sion purchase – or also for that
matter its planned $560 million
takeover of machined compo-
nents supplier Noranco, an-
nounced in late July – or the
week’s other M&A story, the ac-
quisition by UK aerospace firm
Meggitt of Cobham’s advanced
composites activities in a $
million cash purchase.

RECORD-BREAKER
Thompson notes that the buy-
out of Precision – for $32.5 bil-
lion, plus $4.7 billion of as-
sumed debt – is worth twice the
previous sector record, which
was United Technologies’ 2012

takeover of Goodrich for $16.

billion.

Buffett’s purchase of the Port-

land, Oregon components man-

ufacturer – where aerospace

sales account for about two-

thirds of its total revenue of

some $10 billion – is unusual,

making it a poor signal of un-

derlying trends.

But, says Thompson, the

“facts persist”: commercial aer-

ospace is attractive. Prices are

expensive, he notes, but with so

much growth built into the Air-

bus and Boeing order books and

all forecasts pointing to contin-

ued global airliner demand over

the coming decades, deals can

be done.

Warren Buffett, for sure, sees

the upside of his Precision in-

vestment, calling the company

“the supplier of choice for the

world’s aerospace industry”.

That long-term faith in Preci-

sion, and aerospace, is in any

case indicated by the $235 per

share Berkshire will pay, a pre-

mium of about 17% over the

firm’s closing price before the

deal was known.

Richard Aboulafia, a Wash-

ington DC-based analyst with

consultancy Teal Group, says:

“Part of me was surprised for a

deal of this magnitude to take so

long with private capital.” Aer-

ospace, he stresses, is a “safe

haven” for investors who are

sitting on large cash piles but

struggling to find good returns;

commodities, technology and

emerging markets are all down,

and even gold – briefly a safe

haven following the financial

crisis – has tanked.

“We [aerospace] are the best-

looking cow at the fair,” he says.

Precision’s aerospace business,

he adds, is almost exclusively in

supply to aircraft and engine

makers, so Buffett may look for

ways to increase its exposure to

the aftermarket, traditionally a

significant profit centre for

parts suppliers. Ultimately, that

OEM focus means Buffett is plac-

ing a “big bet on commercial air-

liners” and, says Aboulafia, the

skies ahead are not without

dark clouds.

REAL DRIVER

Looking at aerospace through this

particular prism of aircraft de-

mand, Aboulafia notes that the

real driver of new aircraft orders is

the differential between fuel prices

and interest rates. If fuel prices are

low and interest rates rise – highly

likely conditions in 2016 – that dif-

ferential narrows: “The jaws snap

shut, and that’s not good.”

Whether Buffett returns to the

aerospace market remains to be

seen. His new acquisition will con-

tinue to trade as Precision Cast-

parts, and maintain its Pacific

Northwest headquarters. The deal,

which should close in the first

quarter of 2016, will take a chunk

out of Berkshire Hathaway’s $

billion cash pile.

But the prospects for other in-

vestors to take note of this takeover

and look with some urgency for

their own move on aerospace must

be great. As Thompson observes,

cash-rich investors are “hungry”. ■

“We [aerospace] are

the best-looking cow

at the fair”

RICHARD ABOULAFIA

Analyst, Teal Group

Warren Buffett describes Precision Castparts as the global industry’s “supplier of choice”

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