17th Aug 2023 11:28
(Alliance News) - Market analysts were generally approving of BAE Systems PLC's latest acquisition, deeming it to be complementary to the firm's operations, though its shareholders seemed to take fright at the price tag.
On Thursday, the defence company said it has agreed to acquire Ball Aerospace from Ball Corp for around USD5.55 billion in cash. It will be funded from a combination of new external debt and existing cash resources.
Ball Aerospace provides mission-critical space systems and defence technologies across air, land and sea, and will serve to strengthen BAE's multi-domain portfolio. The acquisition will add to an "attractive and strengthened" revenue outlook for BAE Systems.
"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," said BAE Chief Executive Charles Woodburn.
If completed, the deal would be among the largest deals by a UK corporate this year, Shore Capital noted.
To AJ Bell investment director Russ Mould, the acquisition is "a reminder there is more to the business than just being a maker of armaments".
"BAE is looking to expand in nascent sectors like space as well as build on its capabilities in electronics and this deal looks a decent fit in both areas," he considered.
As noted by Aarin Chiekrie, equity analyst at Hargreaves Lansdown, the consideration is a "mammoth" sum - equivalent to almost 20% of BAE's market cap.
"The acquisition should add around USD2.2 billion in revenue to BAE's top line, before growing at a compound rate of around 10% annually over the next 5 years. And given the similarities between the two businesses, there's clear scope to streamline operations, cut costs and boost profit margins," he added.
Revenue in 2022 was GBP21.26 billion, rising from GBP19.52 billion.
To Mould, "the only downside" is the price tag, which looks "a touch on the expensive side".
"[This] potentially explains the initial lukewarm reaction from shareholders to the deal," he noted.
Shares in BAE Systems were down 4.3% at 959.40 pence each in London on Thursday late morning.
"The cost will raise the pressure on the company to execute smartly on the integration process. Assuming it hits the targets it has outlined then it should be earnings accretive in the short term," Mould added.
"The fact BAE has been able to carry out a transaction like this with a minimum of fuss is in itself testament to its improved fortunes," he concluded.
To Shore Capital, the deal is indicative of not only BAE's fortunes, but it is a "vote of confidence" in the whole of the defence sector.
"We are not surprised that an acquisition like this is happening. It is a theme that we expect to continue, not just with BAE Systems, but across the defence industry as players look to scale up their operations so that they can capitalise on the long term uptick for defence products," said Shore's Jamie Murray.
By Elizabeth Winter, Alliance News senior markets reporter
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