KKR to buy Airbus’ defence electronic business

May 2016 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

American private equity giant KKR has agreed to acquire the defence electronics division of Airbus Group for around $1.24bn, including debt.

According to a statement released by Airbus announcing the deal, the transaction is expected to close in the first quarter of 2017, pending regulatory approval. KKR had reportedly been interested in securing a deal since December 2015; the firm allegedly beat rival The Carlyle Group and a number of other interested parties. There is some suggestion that KKR may have overpaid given that defence businesses tend to sell for a valuation of around 100 percent of their annual sales. KKR, by comparison, is paying 110 percent for the firm.

Airbus will retain a 25 percent stake in the unit for a maximum of three years, a move which has been designed to calm the nerves of the German government which was believed to have played a role in the divestiture. The German Ministry of Defence is the division’s biggest single customer; accordingly, the sale to KKR has been a highly sensitive matter. The company also employs around 4000 staff globally, and the German government has expressed concern that the sale may impact jobs in the country. KKR has gone some way to assuage those fears, saying it would continue to support and nurture the unit, which is based in Ulm, Germany.

Airbus’ decision to divest its unit comes as it begins to focus on producing warplanes, missiles, launchers and satellites in the face of low defence spending in Europe. The disposal of the defence electronics unit is likely to be followed by further divestitures in the short term, with intentions to dispose of assets with combined annual revenue of around €2bn. The restructuring has been a work in progress since September 2014 when the company’s chief executive Tom Enders announced the realignment of Airbus’ defence and space operations on military aircraft, missiles and satellites.

In a statement Bernhard Gerwert, the chief executive of Airbus Defence and Space, said, “This is an excellent outcome for our Orlando process which aimed at repositioning defence electronics for the future with an excellent outcome for all stakeholders. Defence Electronics is a strong, profitable business with significant growth potential and we are convinced that KKR and the defence electronics management team and employees will continue to strongly develop the business going forward.”

For KKR, the acquisition of the defence electronics division comes on the heels of the firm’s last foray into aviation. In 2014, the firm made an investment of more than $100m in the helicopter unit of Lease Corporation International.

KKR will hope to further develop its new acquisition, which generates annual sale of around €1bn. Johannes Huth, member and head of KKR Europe, Middle East and Africa, said, “We are delighted to have been chosen as the best partner for the defence electronics business. KKR will support the growth and development of the company with its financial resources, international network, long-standing expertise in the global industrial sector and its extensive experience building successful industrial companies in Germany, such as MTU Aero Engines, Demag Cranes and Kion.”

KKR has made investments in defence assets previously. Indeed, a number of PE groups were active in the defence space in the late 1990s and 2000s. The firm was one of a number of companies in an investor group which paid Northrop Grumman Corp $1.6bn for its TASC Inc. unit, Engility Holdings Inc. PE firms have begun to look again to the aerospace and defence industries in recent months as valuations in the industry have begun to fall.

KKR’s stock fell 1.73 percent in trading in New York the day after the deal was announced, while Airbus’ stock rose 1.8 percent.

Richard Summerfield