Jet Suppliers Go on Merger Spree Trying to Keep Up With Boeing and Airbus Output

(Bloomberg) -- Airbus SE and Boeing Co.’s record output of jetliners is spurring a blistering pace of mergers among aerospace suppliers as companies seek growth to keep up with demand, according to a Lazard Ltd. investment banker.

The market for deals, which reached an all-time high of $120 billion last year, is “extremely robust,” Michael Richter, head of aerospace and defense, said in an interview. As an indication of the high level of interest, he said he met more than 40 prospective buyers and sellers at last month’s Paris Air Show.

With the European and U.S. planemakers sitting on record order backlogs, suppliers are under pressure to accelerate production of everything from basic components to sophisticated sub-assemblies like fuselage and wing sections. Businesses lower down the supply chain are most under pressure, Richter said, forcing them to consider M&A to meet demand and avoid holding up programs.

“Less-capable companies are having trouble operating at significantly higher rates and see M&A as a way of getting stronger,” he said. While consolidation has given suppliers more pricing power, manufacturers “would rather that than have to stop a program because a Mom-and-Pop operator can’t keep up.”

Looking beyond landmark deals such as the United Technologies Corp.-Raytheon Co. merger announced last month, 2019 is looking good in terms of the number of transactions and their dollar value, Richter said. The annual air show in the French capital fueled that impression, with a high volume of meetings and “quality” interactions from which Lazard aims to reap the benefits in the next year, he said.

The U.S. remains a focus for transactions as the dominant player in global aviation. Yet cross-border demand is strong as companies target new markets. Asian and European suppliers are seeking U.S. deals to gain access to Boeing, while their U.S. counterparts are aiming to expand abroad to improve links to Airbus.

What’s Hot -- and Not

• Aerostructures, including fuselage sections, wing surfaces and flaps, has been the most active area for M&A. The lion’s share of business may now have been done after deals such as last year’s $11 billion takeover of GKN Plc by Melrose Industries Plc, Richter said.
• The jet-engine sector is more splintered and open to consolidation, he said, with Lazard involved in three deals in June alone. Allegheny Technologies Inc. sold its cast-products arm to Consolidated Precision Products Corp., before CPP itself was refinanced in a transaction with Berkshire Partners, and Greenbriar Equity sold EDAC Technologies to South Korea’s Hanwha Aerospace for $300 million.
• Defense deals require visibility into government spending plans. The situation has improved from the days of cuts linked to budget clashes between the White House and Congress under President Barack Obama, Richter said. Hot areas include so-called C4ISR businesses specialized in technologies involving communications, intelligence, surveillance and reconnaissance, as well as drones, cybersecurity and high-end software. “Companies tied to munitions, troop movements and the way wars used to be fought are most in peril,” he said.

--With assistance from Richard Weiss.

To contact the reporter on this story: Christopher Jasper in London at cjasper@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Tara Patel, Andrew Noël

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