Industrial M&A Returns: MDA-SS/L and EADS-BAE
Industrial M&A returned to the space sector over the summer with a vengeance, with the announcement of the acquisition of Palo Alto, California-based satellite manufacturer Space Systems/Loral (SS/L) by Canadian manufacturer MDA Corp. During the summer, news stories also surfaced that EADS, the European consortium and parent company of Astrium, manufacturer of the Ariane launch vehicles and of civil airline maker Airbus, was seeking to acquire U.K. aerospace and defense manufacturer BAE. We will focus on MDA-SS/L in this month’s column, and on EADS-BAE next month.
Under the terms of the MDA-SS/L deal, MDA will pay SS/L’s shareholders $875 million in cash and other payments for a total deal value of about $1.1 billion, approximately SS/L’s 2011 revenues. The $875 million cash purchase price represents 5.7 times SS/L’s 2011 EBITDA. Loral Space and Communications, SS/L’s parent, had sought to raise cash from its manufacturing arm for some time, initially contemplating a spin-off and later searching for a buyer. The MDA-SS/L deal is somewhat a “PacMan” play for MDA, itself an $800 million revenue company in 2011, but is intended to provide the Canadian company with entry into the U.S. space market, a critical and long-sought goal in the face of a home jurisdiction that is far smaller and even less committed to its space program than is the U.S. government. However, because SS/L is so heavily weighted towards the commercial satellite market, ownership by a non-U.S. company was expected to raise fewer concerns than would be the case for a major manufacturer of U.S. military and other government satellites. In fact, on September 21, 2012, the MDA acquisition cleared Committee on Foreign Investment in the U.S. (CFIUS) review, leaving only regulatory approval by the U.S. Department of Justice on antitrust/competition grounds as a regulatory hurdle. The deal is expected to close this fall.
Beyond U.S. market access and a fast rise up the manufacturing vertical from payload, subsystem and occasional full satellite maker to leading prime main bus manufacturer, the transaction poses both opportunities and risks for MDA. MDA likely sees its strengths in payload and subsystem manufacture as complementary to SS/L’s strength as a prime manufacturer, offering potential design, manufacture, assembly and testing efficiencies that will provide a time, cost and reliability competitive advantage in a crowded field. Also, MDA has been a persistent advocate of satellite life extension technology and has proposed a robotic satellite servicing vehicle. SS/L has a contract from the U.S. Defense Advanced Research Projects Agency (DARPA)’s “Phoenix” program to develop robotic vehicles to rendezvous and dock with dead or dying satellites, reviving them for extended use. While most prime manufacturers can be expected not to be enthusiastic about such plans, MDA may figure that it is the future, and the ability to design and build heavy satellite buses configured before launch to be robotic life extension vehicle-friendly will also provide a competitive advantage. Finally, MDA may feel that its Canadian identity may make it easier for SS/L to make some sales in jurisdictions less likely to buy U.S. satellites for political or other reasons.
On the risk side, the manufacturing sector is hobbled by chronic overcapacity, and the rise of export credit agency lending as an indispensible part of satellite finance has tended to tilt the playing field in favor of “national champion” manufacturers of the ECA providing financing. With 6 to 8 leading manufacturers, depending on who is counted, and Boeing and Lockheed Martin edging back into the commercial satellite business in anticipation of slowdowns in U.S. defense spending, there is going to be a lot of pressure to support homegrown manufacturers for the 20 to 25 commercial satellite orders per year. In that environment, it will be interesting to see if SS/L comes to be viewed as a Canadian, rather than American, player. Even without that potential dynamic, MDA is buying into a highly supply-saturated market with a limited number of customers that order a small number of high dollar products. Finally, a smaller company acquiring a larger one always has complex dynamics involving who is the dog and who is the tail, and where strategic attention and resources should be focused. MDA has taken a big bite indeed.
Owen D. Kurtin is the principal of New York City-based law firm Owen D. Kurtin PLLC and a founder and principal of private investment firm The Vinland Group LLC. He may be reached at firstname.lastname@example.org.