Dit is het begin van een artikel uit Defense News 22 september 2008, zie hieronder.
BizWatch
Shelter From the Storm
Experts: U.S. Turmoil Won’t Hurt Defense Firms
By ANTONIE BOESSENKOOL
Despite the hurricaneforce turmoil in the U.S. financial sector, defense companies will be relatively unaffected and could even experience an upside from banking giants’ misfortune, several observers said.
“The defense industry is perhaps among the least impacted by the events of the last week,” said Jon Kutler, founder and CEO of Admiralty Partners, a Los Angelesbased aerospace and defense investment firm. “Defense companies are frankly a tremendous safe haven during the disruptions.” The week saw Merrill Lynch sold to Bank of America, Lehman Brothers declare bankruptcy, and Morgan Stanley enter merger talks with Wachovia. There was also a federal bailout for American International Group, the insurance firm that owns International Lease Finance, an airplane lessor and major customer of both Boeing and Airbus.
But James McAleese, principal at McAleese & Associates, a government contracting and national security law firm, said that in his meetings with major shareholders of defense stocks, the events of last week are “not an issue that’s troubling them.” In fact, a scarcity of cash for private equity acquisitions of defense companies could sweep away the competition for buyout targets.
Private equity deals for defense companies have been slowing, and the events of last week may exacerbate that situation, according to William Farmer, managing director and co-head of Lazard’s aerospace and defense group.
“Certainly over the last 12 months, we’ve seen a lot of the financial sponsors, the private equity firms, become less competitive in going after defense assets and auction processes because of the tightening credit,” Farmer said.
“As private equity firms used to be able to go out and get five or six times leverage to participate in acquiring companies, that is not the case any more,” he said. “More realistically, you’re probably closer to three, three-and-a-half times EBITDA [earnings before interest, taxes, depreciation and amortization] . It puts private equity firms at a significant disadvantage vis-à-vis a lot of the large defense players that are sitting on a considerable amount of free cash flow.” McAleese said less bidding on defense companies by private equity firms could also bring down prices for defense acquisitions.
“To the extent it’s more difficult to raise money, it’s likely to have a retarding impact on private equity,” he said.
“What it will do is make M&A more attractive among true-play defense companies, because it will eliminate the speculator portion of the market,” he added.
“That should reduce the prices; that should make strategic mergers and acquisitions more attractive.” But the main driver behind investment in defense companies and acquisitions continues to be the future direction of defense spending, not fallout in the financial markets, McAleese said. Current expectations are that there may be one last burst of growth in U.S. defense spending in the 2010 budget request before supplemental spending, at least, begins to taper off. And once that happens, the push for mergers and acquisitions will grow.
“Whether the base budget grows or shrinks, that is what will either further delay your next wave of M&A or accelerate your M&A activities as [defense spending] is contracting,” he said.
Mergers and acquisitions among defense companies will still take place, especially when those deals make strategic sense, Farmer said. “There’s still a need to consolidate the defense space, and there are people that are looking to fill voids in their portfolio with niche acquisitions,” he said. “To the extent that they make strategic sense, those [deals] would still happen now, regardless.”
Little Effect on Credit
Another question is the effect of credit market troubles on defense companies’ credit. But the robust cash flow of most defense firms means that even if one bank providing credit disappears, others will be more than happy to step up.
“Most defense companies are flush with cash,” Kutler said. “Right now, they’re very healthy, so they don’t need debt unless they’re making an acquisition.” Moreover, “the borrowing base for defense contractors is substantially better than for their commercial counterparts,” he said. “In today’s marketplace, while banks are not lending, they are substantially more likely to lend to a defense contractor than they are to many commercial companies.” “There’s not a lot of companies in defense that are in danger of going under,” Farmer said. “For most of them, their credit ratings are very solid.” Though Lehman Brothers did provide some credit for defense firms, its role was to arrange credit from other banks. Given Lehman’s bankruptcy filing and a subsequent agreement to sell its major U.S. assets to British bank Barclays, that role is in question, Farmer said.
Lazard is advising Lehman Brothers on the possible sale of its U.S. assets to Barclays. The defense companies most susceptible to the events of last week are those that have exposure to both the commercial and defense markets, according to Kutler. “Aerospace is driven by the business cycle. And the business cycle in the U.S., but also globally, has taken a hit,” Kutler said. “Even though fuel prices have come down, airlines, because of their own health issues and their projections of the impact of this crisis on the global economy, are likely to cancel, reschedule and defer deliveries because they won’t be growing as fast.” Shares of the five largest U.S. defense companies slid early last week, but most had regained lost ground by press time on Friday.
“It just goes to show how this market isn’t trading on fundamentals,” Kutler said. “Certainly nothing happened in the last week that fundamentally changed, even in the near term, the outlooks of these companies.”
