BAE Systems has agreed to buy Ball Aerospace for around $5.55bn in cash, with the deal expected to close in the first half of 2024.
Ball Aerospace has strong positions across the defence, spacecraft and intelligence community, with over 60% of its employees holding US security clearances.
Ball Aerospace is expected to see $2.2bn in revenue and around $310m in cash profits (EBITDA)this year. This should add more than $2bn to BAE's annual revenues, and is expected to grow at a compound rate of around 10% annually over the next 5 years.
BAE's CEO, Charles Woodburn, said that Ball Aerospace has "strong growth prospects" and "is a close fit to our strategy".
The shares fell 3.6% following the announcement.
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Our view
BAE's acquisition of Ball Aerospace looks like a good fit to us and displays serious intent to build out its in-space capabilities and relationships within the US intelligence community. The mammoth $5.55bn deal is expected to be settled in the first half of 2024 and will be funded by new debt and cash on hand.
But until the deal completes it's important to understand how this giant runs day-to-day. BAE is in the defence business - manufacturing heavy-duty military equipment like fighter jets and aircraft carriers - recent global events have increased demand for BAE's products.
A strong set of first-half results have shown that BAE occupies a key space in the defence market. And with some of its biggest buyers, the UK, US and Europe, all expected to continue raising defence budgets over the coming years, the sky's looking bright for this jet-maker.
In the first half, orders were almost double the group's sales, helping to push the group's order book up to an incredible £66.2bn. And because these are typically long-cycle orders, with revenues spread over several years, it gives BAE multi-year revenue visibility.
But keep in mind that profitability hinges on an ability to estimate future costs. The long-term nature of many contracts means that the related risks and costs can change over time. Currently, its turbulent energy costs and potential supply chain issues that management have called out are the main trip hazards.
These risks are currently being navigated well and profits are heading in the right direction. The group's also using some of its financial firepower to acquire other businesses which can slot straight into its portfolio and begin contributing to revenue and profit growth right away.
For now, the balance sheet's looking in good shape. But given the large amount of cash needed for the acquisition of Ball Aerospace, BAE's going to need to take on a decent chunk of debt. That'll put pressure on cash resources moving forward, meaning we could see the rate of shareholder returns slow in the near to medium term.
Although, it was pleasing to see the group's plans to continue the share buyback programme it announced in first-half results.
And the impressive performance across the first half has given management the confidence to bump up its full-year guidance for all its key metrics - and we wouldn't bet against them delivering.
Reliable revenue streams are a very enviable asset and help underpin a prospective dividend yield of 3.1%. Please remember no dividend is ever guaranteed. Ultimately, we think BAE's in good shape to deliver on its long-term growth strategy and the market appears to agree with a valuation some way above the long-term average.
BAE key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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