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.
The UK economy unexpectedly shrank in May, even after the worst of Donald Trump’s tariffs were paused, official figures showed.
A standard measure of economic growth, gross domestic product (GDP), contracted 0.1% in May, according to the Office for National Statistics (ONS).
Rather than a fall being anticipated, growth of 0.1% was forecast by economists polled by Reuters as big falls in production and construction were seen.
It followed a 0.3% contraction in April, when Mr Trump announced his country-specific tariffs and sparked a global trade war.
A 90-day pause on these import taxes, which has been extended, allowed more normality to resume.
This was borne out by other figures released by the ONS on Friday.
Exports to the United States rose £300m but “remained relatively low” following a “substantial decrease” in April, the data said.
Overall, there was a “large rise in goods imports and a fall in goods exports”.
A ‘disappointing’ but mixed picture
It’s “disappointing” news, Chancellor Rachel Reeves said. She and the government as a whole have repeatedly said growing the economy was their number one priority.
“I am determined to kickstart economic growth and deliver on that promise”, she added.
But the picture was not all bad.
Growth recorded in March was revised upwards, further indicating that companies invested to prepare for tariffs. Rather than GDP of 0.2%, the ONS said on Friday the figure was actually 0.4%.
It showed businesses moved forward activity to be ready for the extra taxes. Businesses were hit with higher employer national insurance contributions in April.
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The expansion in March means the economy still grew when the three months are looked at together.
While an interest rate cut in August had already been expected, investors upped their bets of a 0.25 percentage point fall in the Bank of England’s base interest rate.
Such a cut would bring down the rate to 4% and make borrowing cheaper.
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Is Britain going bankrupt?
Analysts from economic research firm Pantheon Macro said the data was not as bad as it looked.
“The size of the manufacturing drop looks erratic to us and should partly unwind… There are signs that GDP growth can rebound in June”, said Pantheon’s chief UK economist, Rob Wood.
Why did the economy shrink?
The drops in manufacturing came mostly due to slowed car-making, less oil and gas extraction and the pharmaceutical industry.
The fall was not larger because the services industry – the largest part of the economy – expanded, with law firms and computer programmers having a good month.
It made up for a “very weak” month for retailers, the ONS said.
Monthly Gross Domestic Product (GDP) figures are volatile and, on their own, don’t tell us much.
However, the picture emerging a year since the election of the Labour government is not hugely comforting.
This is a government that promised to turbocharge economic growth, the key to improving livelihoods and the public finances. Instead, the economy is mainly flatlining.
Output shrank in May by 0.1%. That followed a 0.3% drop in April.
Ministers were celebrating a few months ago as data showed the economy grew by 0.7% in the first quarter.
Hangover from artificial growth
However, the subsequent data has shown us that much of that growth was artificial, with businesses racing to get orders out of the door to beat the possible introduction of tariffs. Property transactions were also brought forward to beat stamp duty changes.
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In April, we experienced the hangover as orders and industrial output dropped. Services also struggled as demand for legal and conveyancing services dropped after the stamp duty changes.
Many of those distortions have now been smoothed out, but the manufacturing sector still struggled in May.
Signs of recovery
Manufacturing output fell by 1% in May, but more up-to-date data suggests the sector is recovering.
“We expect both cars and pharma output to improve as the UK-US trade deal comes into force and the volatility unwinds,” economists at Pantheon Macroeconomics said.
Meanwhile, the services sector eked out growth of 0.1%.
A 2.7% month-to-month fall in retail sales suppressed growth in the sector, but that should improve with hot weather likely to boost demand at restaurants and pubs.
Struggles ahead
It is unlikely, however, to massively shift the dial for the economy, the kind of shift the Labour government has promised and needs in order to give it some breathing room against its fiscal rules.
The economy remains fragile, and there are risks and traps lurking around the corner.
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Is Britain going bankrupt?
Concerns that the chancellor, Rachel Reeves, is considering tax hikes could weigh on consumer confidence, at a time when businesses are already scaling back hiring because of national insurance tax hikes.
Inflation is also expected to climb in the second half of the year, further weighing on consumers and businesses.
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