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.
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The average two-year mortgage rate has fallen below 5% for the first time since the Liz Truss mini-budget.
The interest rate charged on a typical two-year fixed mortgage deal is now 4.99%, according to financial information company Moneyfacts.
It means there are more expensive and also cheaper two-year mortgage products on the market, but the average has fallen to a near three-year low.
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Not since September 2022 has the average been at this level, before former prime minister Liz Truss announced her so-called mini-budget.
The programme of unfunded spending and tax cuts, done without the commentary of independent watchdog the Office for Budget Responsibility, led to a steep rise in the cost of government borrowing and necessitated an intervention by monetary regulator the Bank of England to prevent a collapse of pension funds.
It was also a key reason mortgage costs rose as high as they did – up to 6% for a typical two-year deal in the weeks after the mini-budget.
Why?
The mortgage borrowing rate dropped on Wednesday as the base interest rate – set by the Bank of England – was cut last week to 4%. The reduction made borrowing less expensive, as signs of a struggling economy were evident to the rate-setting central bankers and despite inflation forecast to rise further.
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Bank of England cuts interest rate
It’s that expectation of elevated price rises that has stopped mortgage rates from falling further. The Bank had raised interest rates and has kept them comparatively high as inflation is anticipated to rise faster due to poor harvests and increased employer costs, making goods more expensive.
The group behind the figures, Moneyfacts, said “While the cost of borrowing is still well above the rock-bottom rates of the years immediately preceding that fiscal event, this milestone shows lenders are competing more aggressively for business.”
In turn, mortgage providers are reluctant to offer cheaper products.
A further cut to the base interest rate is expected before the end of 2025, according to London Stock Exchange Group (LSEG) data. Traders currently bet the rate will be brought to 3.75% in December.
This expectation can influence what rates lenders offer.
For around 700,000 teenagers on the treadmill that is the English education system, the A and T-level results that drop this week may be the most important step of all.
They matter because they open the door to higher education, and a crucial life decision based on an unwritten contract that has stood since the 1960s: the better the marks, the greater the choice of institution and course available to applicants, and in due course, the value of the degree at the end of it.
A quarter of a century after Tony Blair set a target of 50% of school-leavers going to university, however, the fundamentals of that deal have been transformed.
Today’s prospective undergraduates face rising costs of tuition and debt, new labour market dynamics, and the uncertainties of the looming AI revolution.
Together, they pose a different question: Is going to university still worth it?
Students at Plantsbrook School in Sutton Coldfield, Birmingham, look at their A-level results in 2024. File pic: PA
Huge financial costs
Of course, the value of the university experience and the degree that comes with it cannot be measured by finances alone, but the costs are unignorable.
For today’s students, the universal free tuition and student grants enjoyed by their parents’ generation have been replaced by annual fees that increase to £9,500 this year.
Living costs meanwhile will run to at least £61,000 over three years, according to new research.
Together, they will leave graduates saddled with average debts of £53,000, which, under new arrangements, they repay via a “graduate tax” of 9% on their earnings above £25,000 for up to 40 years.
A squeezed salary gap
As well as rising fees and costs of finance, graduates will enter a labour market in which the financial benefits of a degree are less immediately obvious.
Graduates do still enjoy a premium on starting salaries, but it may be shrinking thanks to advances in the minimum wage.
The Institute of Student Employers says the average graduate starting salary was £32,000 last year, though there is a wide variation depending on career.
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With the minimum wage rising 6% to more than £26,000 this April, however, the gap to non-degree earners may have reduced.
A reduction in earning power may be compounded by the phenomenon of wage compression, which sees employers having less room to increase salaries across the pay scale because the lowest, compulsory minimum level has risen fast.
Taken over a career, however, the graduate premium remains unarguable.
Government data shows a median salary for all graduates aged 16-64 in 2024 of £42,000 and £47,000 for post-graduates, compared to £30,500 for non-graduates.
Graduates are also more likely to be in employment and in highly skilled jobs.
There is also little sign of buyer’s remorse.
A University of Bristol survey of more than 2,000 graduates this year found that, given a second chance, almost half would do the same course at the same institution.
And while a quarter would change course or university, only 3% said they would have skipped higher education.
Students receive their A-level results at Ark Globe Academy in London last year. File pic: PA
No surprise then that industry body Universities UK believes the answer to the question is an unequivocal “yes”, even if the future of graduate employment remains unclear.
“This is a decision every individual needs to take for themselves; it is not necessarily the right decision for everybody. More than half the 18-year-old population doesn’t progress to university,” says chief executive Vivienne Stern.
“But if you look at it from a purely statistical point of view, there is absolutely no question that the majority who go to university benefit not only in terms of earnings.”
‘Roll with the punches’
She is confident that graduates will continue to enjoy the benefits of an extended education even if the future of work is profoundly uncertain.
“I think now more than ever you need to have the resilience that you acquire from studying at degree level to roll with the punches.
“If the labour market changes under you, you might need to reinvent yourself several times during your career in order to be able to ride out changes that are difficult to predict. That resilience will hold its value.”
The greatest change is likely to come from AI, the emerging technology whose potential to eat entry-level white collar jobs may be fulfilled even faster than predicted.
The recruitment industry is already reporting a decline in graduate-level posts.
A maths exam in progress at Pittville High School, Cheltenham.
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Anecdotally, companies are already banking cuts to legal, professional, and marketing spend because an AI can produce the basic output almost instantly, and for free.
That might suggest a premium returning to non-graduate jobs that remain beyond the bots. An AI might be able to pull together client research or write an ad, but as yet, it can’t change a washer or a catheter.
It does not, however, mean the degree is dead, or that university is worthless, though the sector will remain under scrutiny for the quality and type of courses that are offered.
The government is in the process of developing a new skills agenda with higher education at its heart, but second-guessing what the economy will require in a year, never mind 10, has seldom been harder.
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Universities will be crucial to producing the skilled workers the UK needs to thrive, from life sciences to technology, but reducing students to economic units optimised by “high value” courses ignores the unquantifiable social, personal, and professional benefits going to university can bring.
In a time when culture wars are played out on campus, it is also fashionable to dismiss attendance at all but the elite institutions on proven professional courses as a waste of time and money. (A personal recent favourite came from a columnist with an Oxford degree in PPE and a career as an economics lecturer.)
The reality of university today means that no student can afford to ignore a cost-benefit analysis of their decision, but there is far more to the experience than the job you end up with. Even AI agrees.
Ask ChatGPT if university is still worth it, and it will tell you: “That depends on what you mean by worth – financially, personally, professionally – because each angle tells a different story.”
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