2 Merger Deals in Defense Sector
The pace of consolidation in the aerospace and defense sector kept up Monday, as defense electronics company DRS Technologies Inc. and jet engine parts maker Precision Castparts Corp. each announced plans to buy smaller companies in the industry.
The news helped spark a broad rally in defense shares.
Parsippany, N.J.-based DRS, which makes power distribution parts for Navy ships and computers that process combat information, said it would buy combat systems designer Integrated Defense Technologies Inc. of Huntsville, Ala., for about $373 million, or $17.50 in cash and stock for each Integrated Defense share.
Precision Castparts, based in Portland, Ore., agreed to buy industrial and aerospace fasteners maker SPS Technologies Inc. of Jenkintown, Pa., in a cash and stock deal worth $575 million, or about $43.80 a share.
Los Angeles-based investment bank Houlihan Lokey Howard & Zukin said it counted 146 deals for companies in the aerospace/defense industry through the 12-month period ending in May. That’s up more than a third from a yearly average of 109 transactions for the four years ended 2001.
Though defense spending overall has been rising, “Amplifying growth with target acquisitions is a necessity to sustain company momentum” in the industry, said Jerry Grossman, a managing director at Houlihan.
DRS said its purchase of Integrated Defense would immediately add to earnings. The combined company would have annual sales of about $1.2 billion.
The deal values Integrated Defense at nearly a 17% premium to the stock’s closing price on Friday. The shares surged $2.06 to $17.06 on the New York Stock Exchange on Monday.
But investors sent DRS shares down $3.85, or 13.2%, to $25.30 on the NYSE, on worries the deal price was too high.
DRS is planning to buy Integrated Defense for about 11 times earnings before interest, taxes, depreciation and amortization, said JSA Research analyst Peter Armant. That’s at the high end of the range of four to 12 times EBITDA companies usually pay for others in the defense sector, the analyst said.
“It’s a pretty full multiple,” Armant said. “There’s concern that the synergies may not emerge to justify the price.” Armant added he was confident DRS would integrate the new company with few problems.
DRS has a number of facilities in Southern California, including in Anaheim, Torrance and San Diego. Integrated Defense has a unit in San Jose.
Precision Castparts’ acquisition was greeted with more confidence: The acquirer’s shares added 91 cents to $33.68 on the NYSE, while target SPS soared $9.65, or 28%, to $43.95, also on the Big Board.
Precision said the deal would allow it to build up its aerospace products business and gain exposure to the auto parts market. The combined firm would have annual sales of about $3 billion.
SPS has a number of units in Southern California, including AVK Industrial Products in Valencia, Avibank Manufacturing in North Hollywood and J.F. McCaughin in Rosemead.
Armant said Precision “has a very strong history in removing costs from acquisitions and extracting savings.”
