KAL Capital Newsletter: 2020 in the Rearview
Dear Friends,
Happy belated New Year As we reflect back on 2020 the year was obviously filled with unprecedented challenges to the aerospace and defense sector. However, the more nuanced perspective on the M&A market would be to emphasize 1) the historically seller-friendly market for defense assets and 2) the resiliency of the demand for commercial aero businesses. While the demand for defense assets was somewhat predictable (although the extent was surprising), the M&A environment for commercial aerospace businesses was driven by significant buyer demand, primarily by financial sponsors looking to capitalize on the disruption in the supply chain. That led to a more seller friendly environment than anyone could have predicted as competitive M&A processes have forced buyers to pay “peak” EBITDA multiples off of depressed operating profits.
While we never would have imagined it during 1H 2020, KAL Capital finished the year with a record seven completed sell-side transactions, including four closed deals in Q4. We were fortunate to represent great businesses in the component MRO, composite and space supply-chains. We will describe each of these transactions in the following pages.
Looking into our crystal ball, we expect 2021 to be a historically active year for A&D transaction activity. Our expectations are based on the following assumptions 1) likely changes in capital gains tax treatment, 2) improvements in the commercial aerospace operating environment, 3) near term strength in the DoD budget, and 4) (repeating for emphasis) likely changes in capital gains tax treatment.
The “blue wave” that many business owners within the sector feared has now materialized with all three legislative branches being under Democratic control. We will describe the Biden Administration’s tax plan and funding priorities in greater detail, but the real question is the extent to which slim majorities in both the Senate and House will have on muting the more progressive elements of the Democratic Party. We believe that some level of tax increases for both businesses and capital gains are a foregone conclusion, but we do not expect them to be retroactive for 2021. We feel that this view is rapidly spreading amongst business owners, creating an extremely strong catalyst to initiate liquidity events this year. Potential changes in estate tax treatment including elimination of the step up in basis at death will also nudge tax focused sellers into the market. In conclusion, 2021 will likely be amongst the most active years in A&D M&A history; should be a better ride than 2020!
Sincerely,
Trevor Bohn & Ryan Murphy