BAE/Ball Aerospace: shooting for the stars with $5.6bn US space takeover

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In recent years, US acquirers have scoured the UK for smaller defence businesses they can buy. BAE Systems just reversed the flow. The UK’s national defence champion has struck a deal to buy Ball Aerospace for $5.6bn.

That gives it access to the fast-growing market for space-based defence systems, such as military satellites. Ball Aerospace makes equipment for these as well as for drones and warplanes.

At times of rising global anxiety, such assets do not come cheap. BAE will need to sweat its acquisition to make a decent return. 

BAE has the firepower required for this midsized deal. Strong cash generation pushed first-half leverage well below forecast 2023 ebit. Following the acquisition, it will only rise to 1.7 times — below the average for US defence companies.

Ball Aerospace is an attractive asset. Governments, spy agencies and militaries want to view the globe from above. Sensors and optical gear are also handy for civilian applications. The company’s revenues have been growing at 10 per cent a year and should continue to do so.

Ball Aerospace’s classified contracts — which make up about 50 per cent of its revenues — tend to be less profitable than commercial work. That is reflected in an ebit margin of 10 per cent. That compares with the 16 per cent that BAe manages at its own electronics division.

The advantage with classified contracts is that they tend to be “stickier”. BAE has built a substantial US business, which this acquisition will support. The division, which sits behind a Chinese wall for security reasons, generated over £10bn of revenues last year according to S&P Capital IQ, around half of the group total.

The UK defence group hopes to lift the margin at the target business to 12 per cent over time, as sales increase and $30mn of cost savings feed through.

BAE’s upfront $5.6bn spend will be partly offset by tax savings. Factoring that in, the acquisition price falls to $4.8bn. But that is still 15.5 times Ball Aerospace’s 2023 ebitda, a near-50 per cent premium to BAE itself.

Or, to see it another way, Ball Aerospace looks set to make something like $200mn of operating profit in 2023. Taxed, that is about 4 per cent of BAE’s acquisition cost.

BAE aims to raise its return to above its cost of capital — something like 8 per cent — within five years. It will need booster rockets to meet that target.