Why BAE bought Ball Aerospace and why it matters
For some time now there has been a growing air of confidence around BAE Systems.
That was underlined when, earlier this year, the UK’s biggest defence contractor reported a record order book.
And it was further emphasised when, today, BAE announced it is spending $5.55bn (£4.35bn) on the aerospace division of the US packaging giant Ball Corporation.
The deal, described by BAE as a “unique opportunity to strengthen BAE Systems’ world class multi-domain portfolio”, is the biggest acquisition this year by a British company.
The Ball Corporation is a specialist supplier of satellite systems, geospatial intelligence, tactical solutions and antenna arrays.
The acquisition of its aerospace arm takes BAE more deeply into both the space sector and into what, in defence industry jargon, is described as ‘C4ISR’ – command, control, communications, computers, intelligence, surveillance and reconnaissance.
Ball, the world’s biggest maker of aluminium drink cans, put the business up for sale earlier this year as it seeks to focus on packaging and to reduce its $9.7bn debt pile – which is partly a legacy of its £4.5bn takeover of Rexam, the former FTSE-100 packaging group, in June 2016.
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In November Sir Simon Lister discussed BAE’s Royal Navy contract to build five ships in Govan, Glasgow
Rivals beaten by BAE
BAE faced stiff competition to buy the business.
Private equity companies Blackstone and Veritas Capital were both in the running, as were other defence contractors, including the $61bn US giant General Dynamics and Textron, whose products include Cessna aircraft.
Charles Woodburn, the BAE chief executive, said the business – which BAE had not expected to become available – would be an “excellent addition” to BAE’s portfolio and an “excellent strategic fit”.
He added: “This is a significant and exciting day for BAE Systems.”
Mr Woodburn said Ball Aerospace was expected to grow its sales by 10% a year during the next five years and that it was also expected to add to BAE’s profits during the first year following the deal.
Ball Aerospace has already doubled its sales during the last five years and BAE expects those sales – which were $1.98bn in 2022 – to hit some $4bn by the end of the decade.
Mr Woodburn added: “We are making this acquisition from a position of strength. Ball Aerospace hits the mark in terms of a number of our strategic priorities… [including] defence, intelligence and scientific missions.”
Why BAE bought Ball Aerospace
Mr Woodburn outlined several reasons for buying Colorado-based Ball Aerospace.
The first is that the space sector is a market of growing importance to BAE’s customers. It will also deepen BAE’s relationship with the likes of NASA – one of Ball Aerospace’s key customers.
The second is the growing importance to BAE’s customers of environmental monitoring and surveillance as they seek to respond to climate change.
Ball Aerospace, which employs more than 5,200 people, is a key supplier of advanced remote sensing and other scientific systems and analytic tools and expertise.
It also enjoys a strong relationship with the National Oceanic and Atmospheric Administration, the US government body that provides daily weather forecasts, storm warnings and climate monitoring.
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The third reason is the war in Ukraine.
Tom Arseneault, who heads BAE’s US arm BAE Systems Inc, said the war had led to a surprisingly rapid drawdown of munitions that was forcing governments to spend more in areas such as that serviced by Ball’s tactical solutions business, which supplies stealth cameras and antennas used on land and sea, and in air and space.
He said the company was optimistic about the regulatory process – a key point given that the US government, under first Barack Obama and then Donald Trump, has become increasingly sensitive in recent years about allowing the acquisition of strategic businesses by overseas buyers.
The deal means the US will now account for just under half of BAE’s global sales.
The Prince of Wales talks to BAE Systems apprentice Charlotte and Typhoon delivery director Martin Topping during a visit to RAF Coningsby, Lincolnshire
Debt fears cause shares to fall
Shares of BAE fell by just over 5% on the news amid concerns that BAE’s debt will increase following the takeover.
Some analysts also expressed concerns that Ball Aerospace’s profit margins are slightly below those enjoyed by BAE’s electronic systems arm.
BAE’s margin is between 15-17% while Ball’s margins are between 10-12%.
But Mr Arseneault dismissed that, arguing that synergies between the two businesses would in time bring Ball Aerospace’s margins higher.
He added: “As part of a company with like supply chains, similar customers and… the ability of the teams to leverage each other’s connections and buying power will… underpin margin improvement.”
That pledge probably stacks up given BAE’s recent history.
As Mr Woodburn noted, BAE has a track record during the last few years of improving margins in its electronic systems business, while more broadly it also has a solid track record in integrating acquisitions in this field.
Following the blockbuster merger between US defence giants United Technologies and Raytheon in 2019, US regulators forced the enlarged company to offload a number of businesses, two of which were subsequently snapped up by BAE.
These were successfully integrated into BAE’s electronic systems business despite the disruption posed when the pandemic erupted shortly afterwards.
The bigger picture is that, while many people associate BAE with military hardware such as jet fighters, tanks, submarines and torpedoes – all of which remain important parts of what it does – the company has been evolving over recent years.
Products and services in electronic systems, cyber security and intelligence are an increasingly crucial part of what it offers customers.
The war in Ukraine has highlighted, in particular, the importance of satellite technology.
The way warfare is conducted is changing – and this deal underlines how this important British business is responding.
Waspi campaigners have threatened legal action against the government unless it reconsiders its decision to reject compensation.
In December, the government said it would not be compensating millions of women born in the 1950s – known as Waspi women – who say they were not given sufficient warning of the state pension age for women being lifted from 60 to 65.
It was due to be phased in over 10 years from 2010, but in 2011 was sped up to be reached by 2018, then rose to the age of 66 in 2020.
A watchdog had recommended that compensation be paid to those affected, but Sir Keir Starmer said at the time that taxpayers could not afford what could have been a £10.5bn package.
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From December: No pay out for ‘waspi’ pension women
On Monday, the Waspi campaign said it had sent a “letter before action” to the Department for Work and Pensions (DWP) warning the government of High Court proceedings if no action is taken.
Angela Madden, chair of Waspi (Women Against State Pension Inequality) campaign group, said members will not allow the DWP’s “gaslighting” of victims to go “unchallenged”.
She said: “The government has accepted that 1950s-born women are victims of maladministration, but it now says none of us suffered any injustice. We believe this is not only an outrage but legally wrong.
“We have been successful before and we are confident we will be again. But what would be better for everyone is if the Secretary of State (Liz Kendall) now saw sense and came to the table to sort out a compensation package.
“The alternative is continued defence of the indefensible but this time in front of a judge.”
The group has launched a £75,000 CrowdJustice campaign to fund legal action, and said the government has 14 days to respond before the case is filed.
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What is a Waspi woman and what happened to them?
About 3.6 million women were affected by their state pension age being lifted from 60 to 65. File pic: PA
In the mid-1990s, the government passed a law to raise the retirement age for women over a 10-year period to make it equal to men.
The Conservative-Liberal Democrat coalition government in the early 2010s under David Cameron and Nick Clegg then sped up the timetable as part of its cost-cutting measures.
In 2011, a new Pensions Act was introduced that not only shortened the timetable to increase the women’s pension age to 65 by two years but also raised the overall pension age to 66 by October 2020 – saving the government around £30bn.
About 3.6 million women in the UK were affected – as many complained they weren’t appropriately notified of the changes and some only received letters about it 14 years after the legislation passed.
While in opposition, Rachel Reeves, now the chancellor, and Liz Kendall, now pensions secretary, were among several Labour MPs who supported the Waspi women’s campaign.
The now-Chancellor said in a 2016 debate that women affected by the increase in state pension age had been “done and injustice” and urged the government to “think again”.
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A government spokesperson said: “We accept the Ombudsman’s finding of maladministration and have apologised for there being a 28-month delay in writing to 1950s-born women.
“However, evidence showed only one in four people remember reading and receiving letters that they weren’t expecting and that by 2006, 90% of 1950s-born women knew that the state pension age was changing.
“Earlier letters wouldn’t have affected this. For these and other reasons, the government cannot justify paying for a £10.5 billion compensation scheme at the expense of the taxpayer.”
Russian oligarchs with links to the Kremlin can now be banned from the UK, the government has announced as part of a fresh sanctions package on the third anniversary of Vladimir Putin’s invasion of Ukraine.
The Home Office said “elites” linked to the Russian state can now be prevented from entering the UK under the new sanctions.
Those who could be banned include anyone who provides “significant support” to the Kremlin, those who owe their “significant status or wealth” to the Russian state, and those “who enjoy access to the highest levels” of the regime.
The announcement has been timed to coincide with the three-year anniversary of Russia’s invasion of Ukraine.
Another set of sanctions is expected from the Foreign Office on Monday.
Security minister Dan Jarvis said: “Border security is national security, and we will use all the tools at our disposal to protect our country against the threat from Russia.
“The measures announced today slam the door shut to the oligarchs who have enriched themselves at the expense of the Russian people whilst bankrolling this illegal and unjustifiable war.
“My message to Putin’s friends in Moscow is simple: you are not welcome in the UK.”
The UK government said Kremlin-linked elites can pose a “real and present danger to our way of life” as they denounce British values in public “while enjoying the benefits of the UK in private”.
It said they can act as “tools” for the Russian state to enable President Putin’s aggression in Ukraine and beyond.
Shortly after the war in Ukraine started on 24 February 2022, the UK imposed financial sanctions on oligarchs, including closing legal loopholes used to launder money.
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In November last year, Operation Destabilise, run by the National Crime Agency (NCA), successfully disrupted two billion-dollar Russian money laundering networks operating around the world, including in the UK which was a key hub.
They provided services to Russian oligarchs and were helping fund Kremlin espionage operations.
Ekatarina Zhdanova is said to have run a money laundering network called Smart that has been shut down. Pic: NCA
One of the key players was identified as Ekaterina Zhdanova who is alleged to have run a money laundering network called Smart. She was sanctioned by the US in November last year and is currently in French custody awaiting a trial.
A total of 84 arrests were made under Operation Destabilise in November and more than £20m in illicit funds seized.
The NCA has made a further six arrests since then and seized £1m more in case.
The networks also helped Russian clients to illegally bypass financial restrictions to invest money in the UK.
US officials have been in talks with their Russian counterparts in Saudi Arabia over the future of Ukraine for the past week.
However, neither Ukraine nor any European country was at the table, with Ukrainian President Volodymyr Zelenskyy saying he will not accept any peace deal Kyiv is not involved in.
Sir Keir Starmer has backed Mr Zelenskyy on that so all eyes will be on the prime minister when he visits Mr Trump in Washington DC this week.
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