Industrials Insights from Clearwater International clearthought. The global market continues to soar despite economic turbulence

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1 2016 clearthought Aerospace The global market continues to soar despite economic turbulence Still flying high With passenger traffic set to double¹ over the next 15 years - driven by rising economic growth, urbanisation and tourism the long-term prospects for the aerospace industry remain extremely strong. While the defence sector is showing only modest growth, rising commercial traffic continues to power the industry, driven particularly by growing passenger traffic in Asia-Pacific and the Middle East buoyed by rising demand, falling fares and increased infrastructure. China plans to increase its number of airports from 200 in 2015 to 240 by 2020, while the Gulf remains a hub of extraordinary growth. For instance, Emirates is now the world s largest operator of the Airbus A380 superjumbo and Boeing 777, while it has also started opening new routes to US destinations. Record profits For commercial airlines, the industry is forecasting² record net profits of 32.6bn in 2016, with more than half of the profit coming from North American carriers. The sector s operating margins have been improving over the past few years, boosted by lower fuel costs as a result of lower oil prices. Such increased profitability also gives players greater leverage to upgrade aircraft to next generation models. There is still strong growth in mature markets such as Europe too. For instance, the Spanish aerospace sector, which generates 9.4bn a year, has seen its civilian sector double in turnover since 2006, with growth at around 13% per annum and is forecast to carry on growing at double digit rates. Against this backdrop the two giants of aircraft production - Boeing and Airbus - continue to experience record backlogs on the back of strong demand for newer aircraft. Latest estimates suggest they have a combined order book of more than 12,400 aircraft, worth an estimated nine years of production. However, there are concerns that some airlines may be expanding too quickly and could yet defer delivery of new jets or cancel them. There are worries too over whether suppliers can cope with this rate of increased production and keep pace with their Original Equipment Manufacturer (OEM) customers as they demand greater operating efficiencies. In addition, as aircraft programmes become more technologically complex, and increasingly look for more fuel-efficient and lightweight solutions, this puts even more pressure on supply chains to re-engineer their own business models, global operations and alliances. ¹ Airbus Group: global market forecast ² International Air Transport Association 2016 industry outlook

2 Aircraft focus Commercial market Passenger and freight traffic are forecast to grow at average annual growth rates of 4.6% and 4.4% respectively over the next 20 years¹. Given such forecasts, it is little surprise that Airbus has announced that it is increasing production of two of its newest aircraft, the A320neo single aisle and the A350 wide-body. However, plenty of new models from other OEMs are on the horizon too. Boeing s new long-range 777X goes into production towards the end of the decade, while it is also developing a more fuelefficient single aisle jet, the 737 Max. It is also considering a replacement for its ageing 757. Bombardier has launched its new short-haul C Series, dubbed the whisper jet because it is so quiet. The company claims the aircraft is 20% more efficient than other planes its size and has one of the most sophisticated avionics systems ever built. Embraer has also launched a new E2 model which completed its first test flight in summer Gulf carriers There seems no end to the rise of the Gulf carriers which are also now beginning to make inroads into the US market. For instance, Dubai-based Emirates this year reported a record annual net profit of 1.7bn flying almost 52 million passengers, a rise of 8%. The airline was helped by a 31% drop in its fuel bill as a result of falling oil prices. Etihad Airways, the national airline of the United Arab Emirates, announced its strongest ever annual financial results this year with a net profit of 92m on total revenues of 8bn. It said passenger volumes were continuing to grow faster than capacity, while there had been growth right across its business streams including cargo, Maintenance, Repair and Overhaul (MRO), catering and ground handling. Qatar Airways raised its stake further in International Airlines Group - the owner of British Airways - in which it is the largest shareholder. Analysts say this was in response to the fierce opposition that Gulf carriers have faced over their growing presence in North America, such that transatlantic networks operated by the likes of British Airways become attractive. US China Saudi Arabia Russia UK India France Japan Germany South Korea Brazil Australia Italy Iraq Israel Defence market Military budgets across the world are increasing in the wake of heightened global security threats. Leading the way is the US which still accounts for more than a third of total global military spending and where many significant defence programmes are now entering the engineering manufacturing design phase, including: the F-35 fighter jet; the KC-46A aerial refuelling tanker; the Long Range Strike Bomber; the USAF T-X trainer; and the Rafale fighter programmes. The UK, another significant military spender, recently acquired nine Boeing P-8 maritime patrol aircraft and announced an acceleration of the F-35 combat aircraft programme. Hostilities across the Middle East are driving continued strong demand for military aircraft from governments across the region, while India is also seen as a major market. Last year its defence budget rose 8% and similar growth rates are forecast over the next five years. The major OEMs are all building new military aircraft. For instance, Airbus is developing the A400M military transport aircraft, while Boeing is building the KC-46A aerial refuelling tanker for the US Air Force. Global defence budgets SOURCE: International Institute for Strategic Studies bn Business jets The market is still struggling to recover following the financial crisis. From a peak of 1,317 deliveries in 2008, 718 aircraft 2 were made in 2015, while 2,200 used jets were sold last year compared with an industry average of 2,500. The decline can be seen in the fortunes of Bombardier, the world s biggest supplier of business jets. In the first quarter of 2016 its business aircraft division saw revenues fall 15% to 1.2bn, reflecting its decision to cut production of its Global 5000 and 6000 jets. However, the company still predicts³ the market will support up to 8,300 new business jet deliveries worth 225bn from 2016 to An exciting development is the planned launch by Aerion of a new supersonic business jet, the AS2, which is scheduled to enter service from 2023 and which will be capable of Mach 1.5 (1838 km/h). Meanwhile, business jets are also increasingly being used by the military. Their range, reliability and easy maintenance makes them attractive to the defence industry. In terms of M&A, a notable recent deal saw Textron acquire Beechcraft in a transaction which brought together the Cessna, Beechcraft and Hawker brands. Another transaction saw executive jet service provider BBA Aviation acquire Landmark Aviation for 1.6bn from the Carlyle Group.

3 Helicopter market In response to volatility in oil and gas markets, which are big drivers of demand for helicopters, the industry has adopted a cautious outlook. The market is forecasting 4,300 to 4,800 civilian-use helicopters will be delivered from 2016 to , roughly 400 helicopters lower than the 2015 five-year forecast. The market recently saw its most significant transaction in many years when Lockheed Martin acquired Sikorsky, the world s biggest supplier of military helicopters by sales. The deal was part of Lockheed s move to diversify away from its military business. Meanwhile, Airbus announced plans to assemble helicopters in China as part of a 700m deal to supply 100 H135 light helicopters to the country. Airbus already makes short-haul passenger jets in China, and plans to build helicopters at a factory in Qingdao by Freight market The air cargo market is expected to remain weak throughout 2016 due to sluggish world trade growth. Demand is forecast to grow 3% 5, rising slightly on the 1.9% figure for Growth has also been tempered by increasing onshoring trends, while cargo revenues are expected to shrink slightly to 45.6bn in 2016 from 46.9bn in 2015 as volume grows to 52.7 million tonnes. However, strong demand for passenger travel, which is forecast to increase by 6.9% in 2016, as well as low oil prices, are offsetting the impact of a weak cargo sector. Engines Technological developments are making aircraft more fuel efficient. A notable recent landmark saw Pratt & Whitney's PurePower Geared Turbofan engine successfully complete its first test flight on an Airbus A321neo. The 35,000 thrust rating of the engine gives airlines the ability to fly longer routes while carrying more passengers or payloads. Lufthansa also began flying its first A320neo, powered by Pratt & Whitney PurePower engines, earlier this year. Rolls-Royce s new Trent XWB-97 engine has also made its first flight-test aboard an Airbus A380. The specially enhanced engine produces 97,000lbs of thrust on take-off, making it the most powerful engine ever developed for an Airbus aircraft. Air frames The use of composites and other advanced materials in aircraft design and manufacturing is a defining trend. Composite materials maximise weight reduction as they are typically 20% lighter than aluminium, and this leads to reduced aircraft maintenance costs, added strength and superior durability. A global leader in the design and manufacture of composite structures and components is UK supplier GKN Aerospace. A key focus for the company is to refine conventional production techniques and define new automated and repeatable manufacturing processes, such as automated tape laying (ATL), automated fibre placement (AFP), filament winding, double diaphragm forming, compression moulding and laser ply. Hot topic: Unmanned Aerial Vehicles Global spending on the production of Unmanned Aerial Vehicles (UAVs) for both military and commercial use is forecast to reach $93bn 6 ( 83.7bn) over the next decade, making it one of the most dynamic growth sectors in the global aerospace industry. The market is being driven by the next generation of unmanned combat systems, and the development of new markets such as civil and consumer drones. In particular, the consumer UAV market is growing rapidly as the boundaries between commercial and consumer markets becomes increasingly blurred. For instance, non-military drones are making inroads into logistics and transport as they are perfect for use in remote locations such as oil rigs, offshore wind farms or pipelines. Drones also offer a growing range of applications in the fields of security and surveillance saw the Federal Aviation Administration in the US unveil new rules which formalise the commercial use of drones. 1 Airbus Group: global market forecast Financial Times, May Bombardier market forecast, May Honeywell, Turbine-Powered Civil Helicopter Purchase Outlook 5 International Air Transport Association 2016 industry outlook 6 Teal Group 2015 UAV market profile and forecast

4 M&A analysis Continued consolidation of the supply chain remains a key driver of M&A activity was another strong year with 102 deals 1 recorded across the industry. Deal value in the M&A market actually reached its highest ever level in 2015 thanks to two huge transactions - Berkshire Hathaway's 32.3bn acquisition of Precision Castparts (see right), and Lockheed Martin's 8.1bn purchase of helicopter manufacturer Sikorsky from United Technologies. Meanwhile strong deal volumes have continued into 2016 with both trade and private equity acquirers very active. As our table (overleaf) shows, the leasing sector saw two huge deals with the acquisition of two major Irish companies, Avolon Holdings and AWAS Aviation Capital. The components sector has also seen significant activity with some notable cross-border deals, particularly involving US buyers. The M&A landscape remains dominated by countries with the largest aerospace investment programmes, namely the US, the UK, France and Germany. In the UK Cobham s advanced composites business was acquired by Meggitt, which enhances its materials and manufacturing technologies and product offerings in complex composites. TT Electronics acquired electromagnetic and electronic systems manufacturer Aero Stanrew in a deal which allows TT to offer a wider range of capabilities to a broader base of tier 1 customers. Both these acquisitions highlight the ability and willingness of aerospace corporates to aggressively compete with global buyers with much deeper pockets to secure key strategic assets which will support their growth in key platforms. For management teams across Europe considering an M&A process in the future our advice is straightforward. Only by focusing on what they do best and achieving success within their core business will they be able to broaden their manufacturing capabilities, develop new customers and attract potential acquirers. 1 Mergermarket Recent deal highlights Berkshire Hathaway acquired Precision Castparts Corp., the maker of equipment for the aerospace and energy industries. Precision uses advanced engineering technology to make metal industrial components for jet engines and power plants as well as pipes for the oil and gas industry. Harris Corporation, which makes military radios and air-traffic control equipment, acquired rival Exelis for 4.1bn. EQT VI acquired a majority stake in Nordic Aviation Capital, the world s largest lessor of turboprop aircraft for the global airline industry. Airbus sold its Germany-based defence electronics business, a leading provider of mission-critical sensors, integrated systems and services for premium defence and security applications, to Kohlberg Kravis Roberts. GKN acquired Fokker Technologies of the Netherlands. Fokker specialises in the design, development and production of lightweight aero structures, electrical wiring interconnection systems and landing gear. Sagard Private Equity Partners acquired air transportation equipment group Alvest, a global leader in airport ground support equipment and replacement parts distribution. The Chinese Nanshan Group took a minority stake in Virgin Australia, joining Chinese conglomerate HNA Group with a stake in the airline. HNA has also acquired Switzerland s Gategroup Holding, an airline catering business, baggage handler Swissport International, and aircraft leasing group Avolon which owns more than 250 jets.

5 Global aerospace deals Date Target Target Country Segment Bidder Bidder Country 2016 Avolon Holdings Ltd Ireland Leasing Bohai Leasing Co Ltd 2015 AWAS Aviation Capital Ltd Ireland Leasing Macquarie AirFinance Enterprise Value m EBITDA Multiple China 5, x Ireland 3,096 n.a 2015 Nordic Aviation Capital AS Norway Aircraft EQT Partners Sweden 2, x 2015 Landmark Aviation LLC UK MRO BBA Aviation plc UK 1, x 2016 Airbus SA's defence electronics business 2015 Fokker Technologies Group B.V Nordisk Aviation Products, A/S France Components Kohlberg Kravis Roberts USA 1,021 n.a Netherlands Components GKN plc UK x Norway Components TransDigm Group Inc 2016 Patria Oyj (49% stake) Finland Prime Contractor Kongsberg Gruppen ASA 2015 Alvest SAS France Equipment Sagard Private Equity Partners USA 560 n.a Norway x France 214 n.a 2016 TCR International NV Netherlands Leasing 3i Infrastructure UK 186 n.a 2015 Shimtech Industries UK Components Liberty Hall Capital Partners USA 170 n.a 2015 Cobham plc advanced composites businesses UK Components Meggitt plc UK 154 n.a 2016 Mecadaq SA France Components Activa Capital France 82 n.a 2016 Sigma Composites Ltd UK Components Silverwing Capital Partners UK 77 n.a Conclusion Despite some economic headwinds, the global aerospace industry remains resilient driven by both continued strong demand in the civil market, and a notable pick-up in defence expenditure in response to increasing global security concerns. Against this backdrop companies are having to move fast to keep pace with OEMs and the industry is seeing continued consolidation of its supply chain, with the components sector in particular seeing significant cross-border activity. As both corporates and private investors look to bolster their strategic assets we expect plenty more M&A activity in the months to come.

6 Deal highlights Some of our aerospace deals NavAero Developer of tablet-based and aircraft-dedicated electronic flight bag systems to airlines Clearwater International advised NavAero during the sales process and identified the buyer ESG Provider of engineering services to the aerospace, automotive and defence sectors Clearwater International advised ESG on the sale of AC&S srl and the ILS business of AC&S GmbH to Studec SA Meet the team Constantine Biller International Head of Industrials, UK Simon Zhang Partner, China x 813 zhang.yi@cwicf.com Philippe Croppi Partner, France philippe.croppi@cwicf.com Farsound Manufacturer and distributor of aerospace components Clearwater International advised Farsound on its sale to RG Industries LLP Alter Technology Provider of aerospace and satellite electronics engineering services Clearwater International advised the shareholders of Alter during the sale to TÜV NORD Tritech Manufacturer of aerospace castings Clearwater International advised Tritech during the sale to Neterwala Group of India Precision Micro Manufacturer of precisionengineered, mission-critical components Clearwater International advised on the sale of Precision to Meggitt plc Markus Otto Partner, Germany markus.otto@cwicf.com Rui Miranda Partner, Portugal rui.miranda@cwicf.com Francisco Gomez Partner, Spain francisco.gomez@cwicf.com Jon Hustler Partner, UK jon.hustler@cwicf.com Carsten Rydahl Simonsen Associate Partner, Denmark carsten.rydahl@cwicf.com CHINA DENMARK FRANCE GERMANY IRELAND PORTUGAL SPAIN UK US