BAE Systems announced that it has entered into a definitive Stock Purchase Agreement to acquire the Ball Aerospace business from Ball Corporation for $5.55 Billion in cash, subject to customary closing adjustments. The acquisition of Ball Aerospace enriches BAE Systems' multi-domain portfolio with mission-critical space systems and defense technologies across air, land, and sea domains. This alignment bolsters growth potential in areas crucial to the US Intelligence Community and Department of Defense, enhancing their position in military and civil space, C4ISR, and missile markets. The integration brings valuable synergies in high-caliber space solutions, backed by shared cultural values of innovation. Substantial investments in top-tier facilities underline growth prospects, resulting in increased US classified revenues and expanded offerings.
The proposed stock transaction will be treated as an asset purchase for federal tax purposes, with an expected net present value tax benefit of $750 Million making the underlying economic consideration for the business $4.8 Billion.
Anticipated to bring value-enhancing financial outcomes, the acquisition is poised for a projected revenue compound annual growth rate (CAGR) of approximately 10% over the next five years, accompanied by potential margin expansion. Immediate benefits are envisaged, with accretion to both margins and earnings per share within the first year post-completion, incorporating ongoing cost synergies. The move is set to further augment cash flow per share within the same timeframe. Moreover, the return on invested capital (ROIC) is forecasted to surpass the weighted average cost of capital (WACC) within five years after completion. Notably, the transaction is characterized by a multiple of around 13x 2024 estimated EBITDA net of tax benefit and ongoing cost synergies. Funding for the proposed acquisition will be achieved through a blend of new external debt and existing cash resources.
BAE Systems presents a structurally compounding investment case, characterized by an appealing and reinforced revenue outlook. The prospect includes enhanced margins and ongoing expansion possibilities, all underpinned by robust cash conversion. This strategic move aligns seamlessly with the established capital allocation policy and accommodates the continuation of share buyback activities, in line with the announcement made during 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 defense 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, the US Department of Defense, and civilian space agencies. The business has been a pioneer in its markets for many decades and is organized into four main divisions: National Defense, Tactical Solutions, Civil Space, and Advanced Technology and Information Solutions.
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 a 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 its portfolio with significant scale and high-end technology capabilities. Ball Aerospace will add more than $2 Billion in annual revenues in the growing space domain, C4ISR, and missile and munitions markets. The acquisition will provide the US business with a position in some of the fastest-growing segments of the defense market and further increases its alignment to enduring customer priorities embodied in the US National Defense Strategy.
The growth outlook, anticipated at a 10% CAGR over the next five years will build on their US business’ existing strong portfolio by expanding its 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.
Strong synergy potential
With complementary adjacencies, Ball Aerospace and Bae's will have expanded opportunities to create, develop, and manufacture solutions to some of the customers’ most challenging problems. It will position us to capture anticipated future market growth driven by modernization and recapitalization requirements. The differentiated products and capabilities in Ball Aerospace will also offer further acceleration of the pursuit of next-generation solutions across a number of 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 $30 Million p.a run rate, with savings resulting from improved competitive positioning, procurement savings, and improved program 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 BAE and Ball Aerospace and adds further resilience to the existing franchises in the face of evolving customer needs and emerging technologies.
Value enhancement
The business is expected to achieve revenues of approximately $2.2 Billion and adjusted EBITDA of approximately $310 Million 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 its value-compounding model of good sustained organic growth, margin expansion, and strong cash generation.
The net acquisition price of $4.8 Billion 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.
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.
