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Merger acitivity in A&D sector busiest in 30 years

May 19, 2011, Montreal - 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.

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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."


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