M&A activity busiest in 30 years in aerospace/defence: PwC

Increased merger and acquisition (M&A) activity in Canada's aerospace and defence sector in the first quarter of 2011 was in line with increased global activity, which saw the greatest number of deals in thirty years, according to a new report by PwC (PricewaterhouseCoopers). Globally, the first quarter of 2011 saw seventeen deals for a total of US$9.5 billion. This was an increase of 70 per cent in volume over the same period the previous year.

The announced acquisition of Canada's Vector Aerospace by Eurocopter for US $611 million is the largest deal in Canada since 2007 when Hexagon AB of Sweden acquired Canada's Novotel for US$430 million. The Vector Aerospace acquisition was the third largest deal globally for Q1.

PwC has a positive outlook for continued deal activity in the Canadian A&D sector. In April, Canadian Helicopters Group acquired New Zealand's Helicopters Pty Ltd for $125 million. 

PwC expects four factors, positive and negative, to influence the A&D sector in Canada for the remainder of the year.

1. Increased defence deal making, including military programs such as the F-35 Joint Strike Fighter and military helicopters.
2. Fuel prices and strong Canadian dollar: oil price volatility combined with geopolitical uncertainty in the Middle East impedes OEMs and suppliers from forecasting volumes and planning for production. Many firms may 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 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 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. More MRO deals: PwC expects firms in the maintenance, repair and overhaul 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.