REG - BAE SYSTEMS PLC - Acquisition

BAE SystemsAnnouncement

17/08/2023 07:00

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RNS Number : 6242J  BAE SYSTEMS PLC  17 August 2023

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF
THE MARKET ABUSE REGULATION (EU) NO 596/2014 AS IT FORMS PART OF UK DOMESTIC
LAW BY VIRTUE OF THE EUROPEAN UNION (WITHDRAWAL) ACT 2018 - FOR IMMEDIATE
RELEASE

      17 August 2023

BAE Systems plc - Proposed acquisition of Ball Aerospace

BAE Systems plc ("BAE Systems" or the "Company") announces that it has entered
into a definitive Stock Purchase Agreement to acquire the Ball Aerospace
business from Ball Corporation for c.$5.55bn in cash, subject to customary
closing adjustments. The proposed stock transaction will be treated as an
asset purchase for federal tax purposes, with an expected net present value
tax benefit of c.$750m making the underlying economic consideration for the
business c.$4.8bn.

Ball Aerospace is a unique opportunity to strengthen BAE Systems' world class
multi-domain portfolio

·      Leading provider of mission critical space systems and defence
technologies across air, land and sea domains

·    Strong growth potential in areas aligned with the US Intelligence
Community and Department of Defense's highest priorities

·      Attractive positioning and outlook across military and civil
space, C4ISR and missile and munition markets

·      Highly complementary fit adding material scale of high calibre
space, optical and antenna solutions

·      Excellent cultural fit with a long and distinguished track record
of innovation and product development

·      Substantial investment in world class facilities and capabilities
in the last five years to support growth

·      Substantial increase to our US classified revenues, offerings and
embedded customer relationships

Value enhancing financial effects

·      Expected revenue CAGR of c.10% over the next five years with
scope to expand margins

·      Accretive to margins and earnings per share in the first year
post completion including run-rate cost synergies

·      Accretive to cash flow per share in the first year

·      ROIC expected to exceed WACC within five years post completion

·      Multiple of ~13x 2024E EBITDA net of the tax benefit and run-rate
cost synergies

·      Proposed acquisition to be funded by a combination of new
external debt and existing cash resources

BAE Systems structurally compounding investment case

·      Attractive and strengthened revenue outlook

·      Improved margins and continued expansion potential

·      Strong cash conversion

·     Consistent with capital allocation policy and allows for continued
share buyback activity as announced with the Half Year 2023 results

Commenting on today's announcement, Charles Woodburn, Chief Executive of BAE
Systems, said:

"The proposed acquisition of Ball Aerospace is a unique opportunity to add a
high quality, fast growing  technology focused business with significant
capabilities to our core business that is performing strongly and well
positioned for sustained growth. 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.

"The strategic and financial rationale is compelling, as we continue to focus
on areas of high priority defence and Intelligence spending, strengthening our
world class multi-domain portfolio and enhancing our value compounding model
of top line growth, margin expansion and high cash generation.

"We couldn't be more pleased to have reached this agreement and we look
forward to welcoming the employees of Ball Aerospace to BAE Systems as we work
together to support our customers and create value for shareholders."

Ball Aerospace is a Space and Defence technology leader

Ball Aerospace is a leading provider of spacecraft, mission payloads, optical
systems, and antenna systems with decades of proven success underpinned by
world class advanced technologies. They have trusted customer relationships
among the Intelligence Community, US Department of Defense, and civilian space
agencies. The business has been a pioneer in its markets for many decades and
is organised into four main divisions: National Defense, Tactical Solutions,
Civil Space, and Advanced Technology and Information Solutions.

The business operates across a broad base of customers and platforms. It is
well positioned in highly attractive markets, military and civil space, C4ISR,
and missile and munitions. The space market exposure extends across positions
in defence, intelligence, and scientific missions. The Tactical Solutions
business is well positioned to capture expected increases in demand for
missiles and munitions.

The business is headquartered in Colorado, with more than 5,200 employees, of
whom over 60% hold US security clearances.

Ball Aerospace has high revenue visibility and strong growth outlook

The business has a long and distinguished track record as a trusted partner
and pioneering innovator.  Over the last five years, Ball Aerospace has
demonstrated its ability to convert its highly differentiated capabilities
into a strong order backlog that has nearly doubled in size. It has invested
around $1bn in world class facilities and capabilities which, combined with
its highly skilled workforce, positions the business to deliver continued
growth for years to come.

The proposed acquisition represents an exceptional opportunity to strengthen
our portfolio with significant scale and high end technology capabilities.
Ball Aerospace will add more than $2bn in annual revenues in the growing space
domain, C4ISR and missile and munitions markets. The acquisition will provide
our US business with a position in some of the fastest growing segments of the
defence market and further increases our alignment to enduring customer
priorities embodied in the US National Defense Strategy.

The growth outlook, anticipated at a c.10% CAGR over the next five years will
build on our US business' existing strong portfolio by expanding our footprint
in space by an order of magnitude, offering a complementary set of customer
relationships in the national security space community, and providing new
access to civil space markets. In addition, Ball's expertise in spacecraft,
mission payloads, optical systems, sensors, scientific and tactical systems,
analytical tools, and world class antenna systems support a broad set of
products and differentiated technologies to address the growing space, C4ISR
and missile and munitions markets.

Highly complementary fit with BAE Systems portfolio and culture

The Ball Aerospace portfolio is highly complementary and offers a number of
adjacencies to our US-based business, with particular opportunities to advance
a number of franchise positions across multiple Electronic Systems businesses.
On completion we expect to report Ball Aerospace as part of that sector.

We believe this proposed acquisition provides compelling value and an exciting
future, underpinned by our companies' shared culture of innovation and strong,
mission-driven values. Our mission of We Protect Those Who Protect Us®
resonates with the Ball Aerospace team, and our adjacent and augmented
positions across the defence, intelligence, and scientific markets will
strengthen our outlook and benefit BAE Systems, the Ball Aerospace business,
and customers alike.

Strong synergy potential

With complementary adjacencies, Ball Aerospace and our US business will have
expanded opportunities to create, develop, and manufacture solutions to some
of our customers' most challenging problems. It will position us to capture
anticipated future market growth driven by modernisation and recapitalisation
requirements. The differentiated products and capabilities in Ball Aerospace
will also offer further acceleration of our pursuit of next-generation
solutions across a number of our US businesses like Electronic Warfare and
C4ISR as they address future customer demand.

In addition to these top line opportunities, we expect there to be cost
synergies c.$30m p.a run rate, with savings resulting from improved
competitive positioning,  procurement savings, and improved programme
execution and management of bids to delivery, all contributing to margin
expansion.

The synergistic nature of the combined portfolio supports growth in adjacent
areas for both our US business and Ball Aerospace, and adds further resilience
to our existing franchises in the face of evolving customer needs and emerging
technologies.

Value enhancement

The business is expected to achieve revenues of approximately $2.2bn and
adjusted EBITDA of approximately $310m in 2023 and has strong growth potential
with an expected revenue CAGR of c.10% over the next five years, with
continued growth expected thereafter. EBIT margins are expected to be around
12% post cost synergies over the medium term. It is an acquisition that aligns
with and enhances our value compounding model of good sustained organic
growth, margin expansion and strong cash generation.

The net acquisition price of c.$4.8bn represents a transaction multiple of ~
13x estimated 2024 EBITDA net of the tax benefit and net of run-rate cost
synergies.  The proposed acquisition is expected to be earnings accretive in
the first full year including run-rate cost synergies, cashflow accretive in
the first year excluding synergies and is expected to achieve a return on
invested capital in excess of cost of capital within five years post
completion.

The proposed acquisition will be funded by a combination of new external debt
and existing cash resources.

Our capital allocation policy remains unchanged. We are committed to a strong
investment grade credit rating and will continue the ongoing share buyback
programmes including that announced with the 2023 H1 results.

Timetable and Regulatory

Completion is subject to customary regulatory approvals and conditions with a
targeted completion date in the first half of 2024. The Agreement includes a
termination fee of US$100 million payable by BAE Systems, Inc. to Ball
Aerospace's parent company in the event the transaction is terminated because
certain required regulatory conditions are not met within the agreed
timeframe.

Listing Rules Disclosures

The proposed acquisition constitutes a Class 2 transaction for the purposes of
the UK Financial Conduct Authority's Listing Rules. During the full year ended
31 December 2022, the Ball Aerospace business generated revenue of $1,977m and
EBIT of $170m, and the business had gross assets of $1,152m.

Analyst and investor presentation

A presentation, for analysts and investors, will be available via WebEx at
9:00 am UK time today (17 August 2023). Details can be found on
investors.baesystems.com, together with presentation slides and this
announcement.  A recording of the presentation will be available for replay
later in the day.

The conference call registration link is detailed below:

https://edge.media-server.com/mmc/p/925ertin
(https://edge.media-server.com/mmc/p/925ertin)

 

For further information please contact:

 Investors                         Media Relations
 Martin Cooper,                    Kristina Anderson,

 Investor Relations Director       Director, Media Relations

 Telephone: +44 (0)1252 383455     Telephone: +44 (0) 7540 628673

 Email: investors@baesystems.com   Email: kristina.anderson@baesystems.com
                                   (mailto:kristina.anderson@baesystems.com)

 

Cautionary statement:

All statements other than statements of historical fact included in this
announcement including, without limitation, those regarding the financial
condition, results, operations and businesses of BAE Systems and its strategy,
plans and objectives and the markets and economies in which it operates, are
forward-looking statements. Such forward-looking statements which reflect
management's assumptions made on the basis of information available to it at
this time, involve known and unknown risks, uncertainties and other important
factors which could cause the actual results, performance or achievements of
BAE Systems or the markets and economies in which BAE Systems operates to be
materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. BAE Systems plc and
its directors accept no liability to third parties in respect of any such
forward-looking statements.

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