International markets in 2015 have been particularly volatile. Many industries faced a slump, but some are still performing adequately, although, uncertainty about the general economic cycle is still permeating the business community.

Nonetheless, the Aerospace & Defense industry has recently retaken a significant spotlight in the news. Overall, it is expected to close with a record year that comes as a surprise given the long period of decline and slow growth. Specifically, the commercial aerospace sector is performing very well while the defense industry has been struggling to adapt to the numerous changes in the industry.

The airline industries’ performance is particularly interesting; it is traditionally cyclical and tends to follow economic trends. The recent success of low-cost carriers like Ryanair and EasyJet in Europe and larger commercial airline like American Airlines in North America have proven that the aviation industry can fight back.

This overall performance of the industry has allowed the Luxembourg-based Luxaviation to come back to the market stronger than ever. Luxaviation is a corporate aircraft operator based in Europe and its main activities are aircraft management and private jets chartering.

Following the most recent news, the company plans to grow this year through the acquisition of ExecuJet. This deal, along with the newly proposed acquisition of United Launch Alliance by Aerojet Rocketdyne Holdings, is a clear proof that the M&A activity in the Aerospace & Defense sector is surging after a prolonged sterile period. Our team strongly believes that this industry should perform well in the short-run and the financial markets reflect this belief.

Luxaviation acquires ExecuJet


Luxaviation, a fast-growing business aviation services group that almost tripled in size after it acquired ExecuJet Aviation Group for an undisclosed sum (which is estimated in the hundreds of millions). In similar fashion to their other recent acquisitions, the Switzerland-based ExecuJet will continue to operate under its name and its upper-management will remain in place.

The deal makes Luxaviation the second-largest business aviation operator in the world, with a combined fleet amounting to more than 250 aircrafts. Prior to the takeover, Luxaviation had 520 employees in 6 European countries and a fleet of 85 aircrafts. ExecuJet had a global workforce of nearly 1,000 employees across Europe, Asia, Africa, Australia, South Africa and the Middle East.

This takeover is the latest example of the effort the industry has been making to consolidate, after the losses it suffered during the Great Recession. The business jet sector has struggled to comply with increased regulation and stricter training, as it is made up of hundreds small companies.

Terms and Structure

Under the terms of the deal, Luxaviation is set to acquire the entire share capital of ExecuJet, whose largest shareholder was formerly Dermot Desmond. The two companies have kept specific details of the terms, such as the type of payment, cash or debt and the actual value of the transaction private.

Drivers of the Deal

The purpose of the acquisition has to do mainly with growth and economies of scale. In fact, Luxaviation has made one of its key goals to have 500 aircrafts under management by 2019. Luxaviation is specifically aiming to save money in terms of fuel, training, and insurance which are typically the highest costs associated with operating a corporate aircraft company. By acquiring such an extensive fleet of aircrafts the firm now has the biggest market share in Europe. Finally, it is of note that the number of strategic acquisitions between small aircraft companies suggests that this is their preferred method of growth, instead of opting for a potentially more expensive organic growth plan.

Aerojet Rocketdyne launches an $2bn offensive for ULA


Aerojet Rocketdyne, owned by Aerojet Rocketdyne Holdings Inc., is a technology-based company that provides innovative solutions to its customers in the aerospace and defence markets. The company was formed in 2013 when Aerojet acquired Pratt & Whitney Rocketdyne from United Technologies Corporation for an undisclosed sum. It focuses on propulsion systems: defence systems products including liquid, solid and air-breathing systems. Their space systems products include electric propulsion systems and components. The company employs almost 5,000 workers and supplies strategic customers such as the Pentagon, NASA, The Boeing Co., Lockheed Martin Corp. and United Launch Alliance.

United Launch Alliance (ULA) is a joint venture between Boeing Co. and Lockheed Martin Corp. created in 2006 with the aim of providing spacecraft launch services to the US government. The company counts on a workforce of 3,600, and has become the principal supplier of defence launches for the Pentagon and NASA. Aerojet Rocketdyne is an important supplier of ULA. Recently, it was revealed that Aerojet has already presented a full offer for the acquisition of the ULA that failed.

Terms and Structure

Uunfortunately Boeing rejected the offer from Aerojet about three weeks ago so the deal, for the moment, will not go through. However, Aerojet claims to be putting together a new proposal for ULA.

Previously, Aerojet Rocketdyne Holdings Inc. submitted an all-cash offer of about $2 billion to ULA that was rejected; the next offer is expected to be slightly higher. ULA was recently struggling to maintain its position as the premier supplier of rockets to the Pentagon due to price competition with manufacturers such as Space Exploration Technologies (SpaceX). The two sides are said to be in advanced talks, but a deal has not been finalized yet and could be derailed again by last-minute hurdles. In fact, the deal is subject to close analysis by Pentagon officials since ULA holds a virtual monopoly on launching US military and spy satellites into orbit. Their co-operation has been vital to the US government as they have sent 99 satellites successfully into orbit without any malfunction. That is why officials are cautionary about any change in ownership that could jeopardize ULA’s flawless launch record. If the deal were to proceed any further, the US Defence Department would likely have to have a very thorough review. Government officials would be looking specifically for financial liabilities and any potential negative effects on the supply chain.

Drivers of the Deal

Despite the monopoly on US military equipment and satellites, its history, and the latest malfunctions suffered by key competitors, ULA’s revenues will still face mounting pressure in the coming years.

A slowdown in orders from the US government has dealt a major blow to their revenue structure. Analysts forecast that ULA’s earnings are expected to drop from $480 million to about $300 million, reducing the pay-out to Boeing and Lockheed and consequently their willingness to continue spending billions of dollars in research. Another wound to lick for ULA came from Congress, which recently banned Russian-built RD-180 rocket engines for military and spy satellite launches. ULA relied heavily on Russian engine technology for its rockets, especially for its enormously successful Atlas V. The company was forced to replace the motor. Their current first choice is the new AR-1 developed by Aerojet, which already produces the primary engine for ULA’s Atlas IV. The front-running candidate to replace the Atlas V rocket engine was previously Blue Origin’s BE-4, since Blue Origin is already set to build the engine for ULA’s next generation Vulcan rocket. However, the plan to construct a new rocket equipped with the BE-4 engine would require ULA to put up an investment of about $1 billion. Boeing and Lockheed are only supporting the development effort on a quarter-by-quarter basis, reflecting concerns about ULA’s outlook and whether or not U.S. lawmakers will allow ULA to sell any more of its existing stock of Russian engines.

You can deduct from the information above that a deal between Aerojet Rocketdyne and ULA can change the circumstances of both companies through new synergies between them.

Aerojet argues that it would be cheaper to integrate its new AR-1 engine into ULA’s existing Atlas V rocket than building a new rocket and engine. Furthermore, the deal opens up new development possibilities for the future, making Aerojet the main supplier of defence launches for the US government, the Pentagon and NASA. The integrated supply chain of the new company would allow Aerojet to decrease its average cost per rocket due to new economies of scale and specialization, mainly from the fact that all previous ULA rockets models will use Aerojet propulsion systems as the sole engine technologies. This would give Aerojet a stronger position in the market competing with the emergence of cheaper rocket manufacturers.

To contact the authors:

Andrea Stragiotti                          andrea.stragiotti@studbocconi.it

Andrés Ibargüen                           andres.ibarguen@studbocconi.it

Davide Magni                                davide.magni@studbocconi.it

Giuseppe Scavolo                         giuseppe.scavolo@studbocconi.it

Luciano Pinto                                luciano.pinto@studbocconi.it