KAL Capital Q2 2021 Newsletter
Hope everyone’s summer is off to a great start with some rest and recovery in your near-term future. For us at KAL, our summer vacations (thankfully, no complaints here!) have been deferred to next-year as the M&A market for A&D businesses is operating at a pace that we have never witnessed. While the increase of businesses for sale (due to changes in capital gains treatment) is not a surprise, the aggressive posture of the buyside has been amazing to witness as valuations and deal structures are firmly above pre-COVID levels and any historical precedent. The supportive environment, already in motion during Q4 2020, has benefitted from COVID restrictions being lifted as well as natural momentum that has both private equity and strategic buyers pursuing transactions aggressively. While we at KAL are grateful for our sell-side mandates as well as the overall M&A market, our experience (maybe cynicism) makes us all too aware that these conditions will not last forever. In the mean-time, it’s a great time to be a seller and we expect 2H 2021 to be the most active period for M&A in the sector in the last 20 years.
In the market, we have seen a few macro-themes develop over the course of 2021. First, the recovery in commercial aerospace has exceeded expectations of even the most optimistic market participant. Generally, the pick-up in air traffic that began in Q1 2021 accelerated dramatically in Q2 with the lifting of COVID restrictions expediting the pent-up demand for leisure travel. The pace of the recovery provided a positive demand-shock to a supply-chain desperate for good news but generally unprepared, particularly from a labor stand-point, to support an increased operating tempo. Like we predicted earlier this year, this pick-up is now translating into a much firmer demand picture for the commercial OEM supply-chain. Domestic airlines have taken this opportunity to place massive orders and take delivery for the many white tail B737MAX that have been built-up over the past several years. While the recovery has been largely focused on narrow-body aircraft, we expect that that international travel will be bouncing back shortly as vaccination rates in Europe and Asia start to trend towards US-levels. This has the supply-chain getting ready for an increase in build-rates on narrow-body programs for the first time in almost three years.
On the defense and space side, early signals from the Biden Administration around defense budget have largely been in line with expectations of 1) “flattish” total spending and 2) a pivot towards building weapon systems to defend against threats from near-peer nation states. While the SPAC craze has subsided a bit, we expect the M&A market to focus on growing niches such as space launch, military LEO and programs like the B-21 and the T-X trainer.
Trevor Bohn & Ryan Murphy