The aerospace division of Ball Corporation will be acquired by BAE Systems plc in an all-cash deal valued at $5.55 billion, the company has announced. The multiple, which appears to be reasonable value for a business that is fairly high growth and cash producing and enhances BAE's exposure to intelligence systems with a particular focus on satellite and geospatial intelligence systems, is not being well received by the markets. When a tax gain for BAE related with the purchase is considered, the valuation appears more reasonable. However, when this benefit is taken into account along with Ball Aerospace's growth trajectory, things actually look very excellent. Ball Corporation's accession to the BAE portfolio expands segments that are experiencing secular growth and is not the result of inefficient capital allocation.
The tax benefits associated with the Ball transaction have caused the projected price to drop from about $5.5 billion to $4.8 billion. Without synergies, the multiple is estimated to be roughly 15.4x EV/EBITDA. If synergies exist, that multiple can decrease by another 10%. Ball's aerospace sector, which focuses on satellites and geospatial intelligence as well as other sensors and intelligence systems, is not particularly inexpensive but its CAGR is strong enough to justify a double-digit multiple.
However, considering the more than 4% price drops of BAE Systems since opening, investors have some concerns. Based on the current valuation change, that implies dis-synergy and/or overpayment in the acquisition of around $1.7 billion. $3.5% of $4.8 billion is $1.7 billion. Given that even 15.4x is not that far of a stretch, there is no possibility that a reasonable consideration for Ball would be $3 billion, or in other words, that BAE overpaid by 50%.
Nevertheless, it makes sense for BAE Systems plc to be increasing internal C&I investment while also engaging in some M&A to mature the firm and position them to offer a next-generation suite of defence technology. As a result, the markets' apparent overreaction to the price decline is significant.
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