UK Aerospace industry continues to thrive

Investment in the Sector

The UK aerospace industry has been a major success story over the last two decades and, after automotive, is the largest manufacturing industry in the UK. With a 17% global share, leading Europe and second only to the US worldwide, and almost 90% of output being exported, UK aerospace industry manufacturing is a critical pillar of the UK economy and an example of how, when strategically supported with investment and access to a highly skilled workforce, high technology manufacturing can thrive in a developed economy. The current outlook is particularly promising with, as at February 2017, a backlog of 13,436 commercial aircraft on order, estimated to be worth approximately £220bn to UK industry.

In order to maintain the competitive positioning that has been cultivated over many years it is critical that the sector attracts continued investment. Industry champions therefore welcomed the commitment last week from Rolls Royce that £150m would be invested in the coming years in new and existing civil aerospace facilities across the East Midlands. Of the £150m planned investment, £90m will be spent on building a new testbed facility, Rolls-Royce's sixth in Derby, that will be used to test large civil aero engines including the Trent XWB, which powers the Airbus A350 XWB and is the world's fastest selling civil large engine. The balance of the investment will be in upgrades at the Company's large engine Maintenance Repair & Overhaul (MRO) facility and manufacturing sites. The investment demonstrates Rolls commitment to manufacturing in the UK and will clearly be well received amongst its extensive domestic supply chain

The Rolls Royce announcement followed Boeing's commitment earlier in the year to open a production facility in Sheffield to manufacture high-tech components for Boeing's Next-Generation 737, 737 MAX and 777 aircraft. Boeing's strategic decision is focused on bringing elements of manufacturing, principally actuation components, in-house however Boeing has confirmed that the establishment of the Sheffield facility will also open up new opportunities for UK suppliers to bid for work with the major OEM.

Despite some concerns being raised over the uncertainty surrounding post-Brexit UK business environment (the most prominent of which were reports in June that Airbus would move production out of the UK if certain "non-negotiable" demands over the free movement of people and trade tariffs are not delivered in upcoming Brexit talks) it appears that general confidence amongst key sector participants remains high and the UK's positioning as a global leader looks set to be maintained.

M&A Trends

With the backdrop of highly favourable market dynamics there is significant interest in the sector from private equity investors keen to back technically-differentiated, quality manufacturing businesses. Examples of financial acquirers seeking market leading assets with strong growth prospects in the last 18 months include:

  • US-based aerospace and defence specialist investor Liberty Hall's acquisitions of turbine components business
  • Bromford Industries and tyre manufacturer Dunlop Aircraft Tyres;
  • Baird Capital's investment in airborne ice protection systems supplier, CAV Ice Protection; and
  • Silverfleet Capital's investment in precision engineered components and fixings manufacturer Sigma Precision Components.

A further noticeable trend in aerospace M&A in the last two years has been Asian acquirers targeting quality UK businesses in the sector. China in particular holds development of the aerospace sector as a key strategic priority and acquisitions of established players provides both immediate access to advanced technology and opens the door to long-held relationships with major sector participants. Prominent transactions include:

  • Shaanxi Ligeance Mineral Resources acquisition of diversified metallic parts manufacturer Gardner Aerospace;
  • Kuang-Chi's investment in aviation focused group Gilo Industries; and
  • state-backed Aviation Industry Corporation of China's (AVIC) purchase of Belfast-based airline seating business Thompson Aero Seating.

Aerospace Industry Outlook

With a highly favourable outlook for the sector, surplus capital to deploy amongst the financial sponsor community and appetite for targeted, strategic additions amongst major corporates the future looks bright for both aerospace M&A and the segment as a whole.

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