BAE Systems is moving into the US space domain with the $5.6bn acquisition of Ball Aerospace, a supplier of mission-critical space systems, in one of the biggest takeovers by a UK company this year.
Charles Woodburn, chief executive of the British defence company, said the deal, codenamed “Project Gemini”, would “significantly enhance our space offering” and “move us further and faster into the space domain in a way we couldn’t do organically”.
The deal is BAE’s biggest ever, and marks the culmination of a long-held ambition to expand into the space sector, where it has a limited presence compared with rivals. It also comes after the war in Ukraine turbocharged defence spending, and accelerated the importance of space as a priority.
“In various domains of modern warfare . . . space, in particular, is seen of increasing importance to modern militaries,” said Woodburn in an interview.
The transaction “takes us to a whole number of other customers in the intelligence community [where] at the moment we don’t have huge exposure”, he added.
Ball Aerospace, founded in the 1950s, was “a business we have been looking at for many years”, said Woodburn. “It was very high up our list of . . . targets. But it hasn’t been available . . . We were keen to add it to our very strong electronic systems footprint within our US business.”
The FTSE 100 company is paying cash for the Colorado-based business, which spans electronic warfare, missiles and munitions, weather forecasting and sensing capabilities. Ball also built the distinctive 6.5 metre diameter mirror for the James Webb space telescope, a unique feat of engineering.
About 70 per cent of the business’s $2.2bn annual turnover is focused on space systems, of which the “vast majority is for defence”, said Woodburn. More than 60 per cent of Ball’s 5,000-strong workforce have security clearance.
The deal comes less than a month after BAE, which builds everything from Eurofighter Typhoon jets to nuclear submarines, lifted its annual profit forecast on the back of increased western defence spending following the war in Ukraine. BAE shares have risen more than 80 per cent since the start of last year, making it the second-best performer on the FTSE 100 over the period. Shares fell just over 4 per cent in morning trading on Thursday.
The BAE chief stressed that the acquisition would not threaten the PS1.5bn share buyback programme announced in the interim results earlier this month. “We sized the buyback with this deal in mind . . . with the intention that we could keep doing that at the rate we spoke about,” said Woodburn.
BAE fought off strong interest from private equity and other defence companies to win Ball from its parent, packaging giant Ball Corporation. But Woodburn insisted BAE had not paid over the odds.
BAE’s existing strong presence in the US allowed it to use a tax benefit to bring down the actual economic cost of the business, in effect reducing the price to $4.8bn. Woodburn said the purchase was on a multiple of about 13 times earnings, against recent space deals priced at more than 20 to 25 times.
“We got this at a price we are happy with,” said Woodburn. BAE’s net debt as a percentage of earnings before interest, tax, depreciation and amortisation would increase from 0.5 to about 1.7 times.
Woodburn said the combination of BAE’s US defence business with Ball would deliver about $30mn a year in cost savings, helping to drive margins at Ball from about 10 per cent at present to 12 per cent.
Ball is expected to add about $310mn in profits this year. “It actually enhances our cash flow,” said Brad Greve, finance director at BAE. The business had delivered annual cumulative growth of about 10 per cent a year over the past five years, and this was expected to continue, said Woodburn.
Ball Corporation said it would use proceeds from the sale to cut debt, and planned to return money to shareholders through buybacks and dividends. Daniel Fisher, Ball’s chair, said BAE “is well-positioned to invest in Ball Aerospace to elevate the combined business to new heights”.
The deal is expected to be completed in the first half of 2024, pending regulatory approval.
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