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Armchair econ (1/12/23)

Happy Thursday, Payload readers. 

We try our best to responsibly manage hype. Today, though, we break from that tradition because we simply cannot help ourselves. Our money-back guarantee: If the photo at the bottom of this newsletter is not the single best thing you see all day, we will eat our own Payload-branded hats. (Thanks, Peter Beck, for the inspiration.)

Today’s newsletter: 📈 ADG M&A heater💸 EIB backs SES program📝 The contract report

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Put On the A&Deal Sleds

2022 was the second largest year of ADG deal-making on record, according to a comprehensive analysis published Wednesday by market intelligence firm HigherGov. BTW…ADG = aerospace, defense, and government. With this one simple trick—using ADG, rather than writing the phrase out in full—we’ve given you seconds of your life back that have now been offset by this sentence.

While anyone interested in the financial dynamics of the ADG world should read HigherGov’s report in full, we’ve flexed our curatorial muscles and donned our finest armchair macroeconomist hats to break down the space takeaways below.

433 ADG transactions were announced in 2022, down 10% from 2021. While 123 deals were announced in Q1 and Q2, volume began to dip in the back half of the year. Q3 saw 105 deals, while Q4 saw just 81.

Move aside, VCs

Below, see the share of ADG acquisitions made by private equity over the last nine years:

Private equity has become a force to be reckoned with in the ADG space. PE shops now account for 47% of all transactions and 41% of deal value. In 2022, the number of completed transactions was 203, up from 182 in 2021, and nearly 90 private equity players were involved.

Smaller, strategic buyouts dominated the M&A landscape in 2022, per HigherGov:

  • Acquisitions of companies with a sub-50 headcount increased from 250 to 282.

  • A majority of the deals followed the “bolt-on” or “buy-and-build” playbook, whereby companies consolidate technology and talent under one roof. PE shops spearheaded 140 transactions in this category (vs. 103 in 2021).

  • 2022 also saw 59 divestitures, compared to 51 in 2021.

In 2021, when interest rates were still low (or lower), private equity firms were “playing catch-up” on capital deployment goals, which partially explains why the year’s transaction volume was so high. As for 2022? We’re not in the business of betting here at Payload, but…if we were, we’d put our chips on private equity accounting for the lion’s share of ADG deals this year.

Space’s time to shine

“Space and cybersecurity, once niches in ADG, are now major pillars of the sector and transaction volume,” HigherGov Founder Justin Siken writes. These were the largest ten announced ADG deals in 2022, with a total dollar value of $30.4B:

  1. Advent International’s $6.4B acquisition of Maxar Technologies

  2. Apollo, J.F. Lehman, and Hill City Capital $5.2B acquisition of Atlas Air Worldwide

  3. L3Harris $4.7B acquisition of Aerojet Rocketdyne

  4. Carlyle Group $4.2B acquisition of ManTech

  5. Eutelsat $3.4B acquisition of OneWeb Global

  6. The $2.1B combination of Vectrus and Vertex Corporation

  7. L3Harris $2B acquisition of the Viasat’s tactical data links business

  8. WSP Global $1.8B takeover of John Wood Group’s Environment & Infrastructure business

  9. Veritas Capital $1.6B acquisition of Chromalloy

  10. Singapore Airport Terminal Services $1.1B acquisition of Worldwide Flight Services

For those following along at home, that’s three of the top five deals involving companies with principal concerns above the Karman line.

Space M&A was down year over year but still quite active in 2022, with 38 transactions completed. The year “was dominated” by geospatial, satcom, and propulsion deals. Below, you can see how space stacks up against other sectors:

Aerospace, Defense, & Government Deal Trends

The case for another bullish year of M&A

Here at Payload, we’ve written extensively on this topic over the last year. HigherGov’s Siken cites many of the same themes we’ve been thinking about:

  • The war in Ukraine and subsequent boosts in Western defense budgets “may encourage a more consolidated and partnership-focused approach within the relatively fragmented European defense industry.”

  • Many ADG contracts last multiple years and generate predictable cash flow, which commands investors’ interest during downturns.

  • Looking ahead, although space sector activity may have reached a local maximum, deal-making will likely stay strong. Some companies will close up shop, unable to tap the capital markets, but most “will likely successfully weather an economic downturn,” Siken writes.

  • The Pentagon has shown a strong interest in space, and even has marching orders from Congress to work more closely with the private sector.

  • On the flipside, the Pentagon and other elements of the federal apparatus have concerns about the state of America’s defense industrial base and consolidation (see: the scuttled Lockheed-Aerojet deal). That could ice out bigger deals, Siken notes, but shouldn’t affect the middle market or startups.

The upshot? Valuation multiples are up. The median trailing 12-month EBITDA multiple for disclosed transaction multiples in 2022 was 13.5x, an all-time high.

Companies looking to sell—with a proven business model, stable cash flows, and the right fundamentals—can still be price makers rather than takers. “Strong demand from strategic buyers and private equity firms with significant dry powder” will carry over into 2023. And cash is king for buyers, given elevated rates and a high cost of capital.

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SES Nets a $323M Loan for Three Satellites

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Image: EIB

Yesterday, the European Investment Bank (EIB) announced that it will lend €300M (~$323M) to Luxembourg-based SES to finance a trio of broadcast satellites that will serve Western Europe, Africa, and the Middle East. It’s the largest investment the EU’s investing arm has made to date into a Luxembourg-based company.

ESA head Josef Aschbacher has repeatedly reaffirmed his support for the private space industry across the EU, emphasizing the need to compete with the US and China in orbit. In a press release, EIB pointed out that the seven-year loan represents their support of the European space economy.

Suzanne Ong, VP of external communications for SES, told SpaceNews that the financing covers about half of the overall program cost. The satellites, procured from Thales Alenia Space, are currently slated for launch in 2024.

A step back: NASA has employed a winning strategy of late, buying services and products from the private sector rather than managing large projects in-house.

Some aren’t convinced that European private capital markets could accommodate a NASA-esque approach across the pond. In an FT op-ed published Wednesday, Sinead O’Sullivan, former HBS researcher, argued that Europe should take a different tack when procuring space infrastructure from the commercial markets.

The private capital markets, she wrote, are constrained in two ways: 1) European venture funds are smaller and unprepared to back large infrastructure projects in space, and 2) these funds often can’t tackle large, complex, and risky defense endeavors.

"Aschbacher’s desire to have governments act as a customer-of-first-resort for European space start-ups is admirable,” O’Sullivan wrote. “But one forward-thinking man cannot bend an industry to his will.”

Payload’s takeaway: The public-private models in the US and EU are quite divergent, and that won’t change overnight.

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In Other News

  • JWST is the shining star at the “Super Bowl of Astronomy” this week.

  • Washington has vowed to safeguard Japanese satellites from attacks.

  • SpaceX is targeting Sunday for the Starlink 2-4 mission launch from Vandenberg.

  • The launcher had four rockets on four pads and two Dragons on orbit Monday.

  • Markets are pricing a peak US interest rate at ~4.9%.

  • Virgin Orbit's ($VORB) "Start Me Up" mission from Cornwall failed due to the second stage engine prematurely shutting down, the company reported.

  • NASA will back R&D focused on flying boats that would probe Titan’s lakes. The agency earmarked a small sum (≤$2.45M) for the research…and flying space boats will most likely never see the light of day, but…you’re saying there’s a chance?

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The Contract Report

  • Quub, an EO startup fresh out of stealth, snagged two USAF contracts. (Via Payload.)

  • NGA awarded Maxar ($MAXR) new contracts worth up to $38.5M. 

  • Spaceflight Inc. signed an agreement with Maritime Launch Services to launch up to five of its Sherpa tugs from Spaceport Nova Scotia starting in 2025.

  • Speedcast won a contract extension from Airbus to provide gateway hosting services for the UK MoD.

  • ESA is partnering with Euroconsult to boost its startup incubation program.

  • Intuitive Machines agreed to add Japanese startup Dymon’s Yaoki rover to its second mission to the Moon.

  • USSF awarded SimX a $1.7M, multi-year contract to develop a VR medical training capability for astronaut recovery missions and space launches.

  • NASA awarded 14 contracts worth $175,000 each through the Innovative Advanced Concepts program. (See: our flying boat musings above.)

  • The agency also procured human capital support from IBEX IT Business Experts, Bryce Solutions, and Strategy Consulting Team in a contract worth $76M.

  • airBaltic will equip its entire Airbus A220-300 fleet with Starlink, the Latvian airline announced this week.

  • SkyFi announced a partnership with Blue Nose Aerial Imaging. It's the first drone partner that the satellite imagery platform has onboarded.

😍 The View from KSC 😍

NASA Snoopy cheeeeeesin

Image: NASA/Isaac Watson

Snoopy is back at NASA Kennedy. The doll, you may recall, flew in Orion around the Moon as the Artemis I zero-gravity indicator. Just look at Snoopy cheesin. That, our friends, is what you call a post-Moon mission glow-up.

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