# BAE Systems strengthens portfolio with Ball Aerospace acquisition

- Link: https://www.directorstalkinterviews.com/bae-systems-strengthens-portfolio-with-ball-aerospace-acquisition/4121125532
- Published: 2023-08-17T07:22:56+01:00
- Author: Amilia Stone

**[BAE Systems plc](https://www.directorstalkinterviews.com/ftse-company/bae-systems-plc/ba.l)**(
L;ON:BA) has announced that it has entered into a definitive Stock Purchase Agreement
to acquire the Ball Aerospace business from Ball Corporation for c.$5.55bn in cash,
subject to customary closing adjustments. The proposed stock transaction will be
treated as an asset purchase for federal tax purposes, with an expected net present
value tax benefit of c.$750m making the underlying economic consideration for the
business c.$4.8bn.

**Ball Aerospace is a unique opportunity to strengthen BAE Systems’ world class 
multi-domain portfolio**

·      Leading provider of mission critical space systems and defence technologies
across air, land and sea domains

·    Strong growth potential in areas aligned with the US Intelligence Community
and Department of Defense’s highest priorities

·      Attractive positioning and outlook across military and civil space, C4ISR
and missile and munition markets

·      Highly complementary fit adding material scale of high calibre space, optical
and antenna solutions

·      Excellent cultural fit with a long and distinguished track record of innovation
and product development

·      Substantial investment in world class facilities and capabilities in the 
last five years to support growth

·      Substantial increase to our US classified revenues, offerings and embedded
customer relationships  

**Value enhancing financial effects**

·      Expected revenue CAGR of c.10% over the next five years with scope to expand
margins

·      Accretive to margins and earnings per share in the first year post completion
including run-rate cost synergies

·      Accretive to cash flow per share in the first year

·      ROIC expected to exceed WACC within five years post completion

·      Multiple of ~13x 2024E EBITDA net of the tax benefit and run-rate cost synergies

·      Proposed acquisition to be funded by a combination of new external debt and
existing cash resources

**BAE Systems structurally compounding investment case**

·      Attractive and strengthened revenue outlook

·      Improved margins and continued expansion potential

·      Strong cash conversion

·     Consistent with capital allocation policy and allows for continued share buyback
activity as announced with the Half Year 2023 results

> **Commenting on today’s announcement, Charles Woodburn, Chief Executive of BAE
> Systems, said:**
> _“The proposed acquisition of Ball Aerospace is a unique opportunity to add a 
> high quality, fast growing  technology focused business with significant capabilities
> to our core business that is performing strongly and well positioned for sustained
> growth. It’s rare that a business of this quality, scale and complementary capabilities,
> with strong growth prospects and a close fit to our strategy, becomes available._
> _“The strategic and financial rationale is compelling, as we continue to focus
> on areas of high priority defence and Intelligence spending, strengthening our
> world class multi-domain portfolio and enhancing our value compounding model of
> top line growth, margin expansion and high cash generation._
> _“We couldn’t be more pleased to have reached this agreement and we look forward
> to welcoming the employees of Ball Aerospace to BAE Systems as we work together
> to support our customers and create value for shareholders.”_

**Ball Aerospace is a Space and Defence technology leader**

Ball Aerospace is a leading provider of spacecraft, mission payloads, optical systems,
and antenna systems with decades of proven success underpinned by world class advanced
technologies. They have trusted customer relationships among the Intelligence Community,
US Department of Defense, and civilian space agencies. The business has been a pioneer
in its markets for many decades and is organised into four main divisions: National
Defense, Tactical Solutions, Civil Space, and Advanced Technology and Information
Solutions.

The business operates across a broad base of customers and platforms. It is well
positioned in highly attractive markets, military and civil space, C4ISR, and missile
and munitions. The space market exposure extends across positions in defence, intelligence,
and scientific missions. The Tactical Solutions business is well positioned to capture
expected increases in demand for missiles and munitions.

The business is headquartered in Colorado, with more than 5,200 employees, of whom
over 60% hold US security clearances.

**Ball Aerospace has high revenue visibility and strong growth outlook**

The business has a long and distinguished track record as a trusted partner and 
pioneering innovator.  Over the last five years, Ball Aerospace has demonstrated
its ability to convert its highly differentiated capabilities into a strong order
backlog that has nearly doubled in size. It has invested around $1bn in world class
facilities and capabilities which, combined with its highly skilled workforce, positions
the business to deliver continued growth for years to come.

The proposed acquisition represents an exceptional opportunity to strengthen our
portfolio with significant scale and high end technology capabilities. Ball Aerospace
will add more than $2bn in annual revenues in the growing space domain, C4ISR and
missile and munitions markets. The acquisition will provide our US business with
a position in some of the fastest growing segments of the defence market and further
increases our alignment to enduring customer priorities embodied in the US National
Defense Strategy.

The growth outlook, anticipated at a c.10% CAGR over the next five years will build
on our US business’ existing strong portfolio by expanding our footprint in space
by an order of magnitude, offering a complementary set of customer relationships
in the national security space community, and providing new access to civil space
markets. In addition, Ball’s expertise in spacecraft, mission payloads, optical 
systems, sensors, scientific and tactical systems, analytical tools, and world class
antenna systems support a broad set of products and differentiated technologies 
to address the growing space, C4ISR and missile and munitions markets.

**Highly complementary fit with BAE Systems portfolio and culture**

The Ball Aerospace portfolio is highly complementary and offers a number of adjacencies
to our US-based business, with particular opportunities to advance a number of franchise
positions across multiple Electronic Systems businesses. On completion we expect
to report Ball Aerospace as part of that sector. 

We believe this proposed acquisition provides compelling value and an exciting future,
underpinned by our companies’ shared culture of innovation and strong, mission-driven
values. Our mission of We Protect Those Who Protect Us® resonates with the Ball 
Aerospace team, and our adjacent and augmented positions across the defence, intelligence,
and scientific markets will strengthen our outlook and benefit BAE Systems, the 
Ball Aerospace business, and customers alike.

**Strong synergy potential**

With complementary adjacencies, Ball Aerospace and our US business will have expanded
opportunities to create, develop, and manufacture solutions to some of our customers’
most challenging problems. It will position us to capture anticipated future market
growth driven by modernisation and recapitalisation requirements. The differentiated
products and capabilities in Ball Aerospace will also offer further acceleration
of our pursuit of next-generation solutions across a number of our US businesses
like Electronic Warfare and C4ISR as they address future customer demand.

In addition to these top line opportunities, we expect there to be cost synergies
c.$30m p.a run rate, with savings resulting from improved competitive positioning,
procurement savings, and improved programme execution and management of bids to 
delivery, all contributing to margin expansion.

The synergistic nature of the combined portfolio supports growth in adjacent areas
for both our US business and Ball Aerospace, and adds further resilience to our 
existing franchises in the face of evolving customer needs and emerging technologies.

**Value enhancement**

The business is expected to achieve revenues of approximately $2.2bn and adjusted
EBITDA of approximately $310m in 2023 and has strong growth potential with an expected
revenue CAGR of c.10% over the next five years, with continued growth expected thereafter.
EBIT margins are expected to be around 12% post cost synergies over the medium term.
It is an acquisition that aligns with and enhances our value compounding model of
good sustained organic growth, margin expansion and strong cash generation.

The net acquisition price of c.$4.8bn represents a transaction multiple of ~ 13x
estimated 2024 EBITDA net of the tax benefit and net of run-rate cost synergies.
The proposed acquisition is expected to be earnings accretive in the first full 
year including run-rate cost synergies, cashflow accretive in the first year excluding
synergies and is expected to achieve a return on invested capital in excess of cost
of capital within five years post completion.

The proposed acquisition will be funded by a combination of new external debt and
existing cash resources.

Our capital allocation policy remains unchanged. We are committed to a strong investment
grade credit rating and will continue the ongoing share buyback programmes including
that announced with the 2023 H1 results.

**Timetable and Regulatory**

Completion is subject to customary regulatory approvals and conditions with a targeted
completion date in the first half of 2024. The Agreement includes a termination 
fee of US$100 million payable by BAE Systems, Inc. to Ball Aerospace’s parent company
in the event the transaction is terminated because certain required regulatory conditions
are not met within the agreed timeframe.

**Listing Rules Disclosures**

The proposed acquisition constitutes a Class 2 transaction for the purposes of the
UK Financial Conduct Authority’s Listing Rules. During the full year ended 31 December
2022, the Ball Aerospace business generated revenue of $1,977m and EBIT of $170m,
and the business had gross assets of $1,152m.

**Analyst and investor presentation**

A presentation, for analysts and investors, will be available via WebEx at 9:00 
am UK time today (17 August 2023). Details can be found on investors.baesystems.
com, together with presentation slides and this announcement.  A recording of the
presentation will be available for replay later in the day.

The conference call registration link is detailed below: https://edge.media-server.
com/mmc/p/925ertin

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