Shares in BAE Systems (BA.) fell over 3% in morning trading to 967p after the defence firm said it was buying US spacecraft company Ball Aerospace.

The share price decline could be due to investors’ concerns over how defence giant BAE Systems is going to fund the purchase going forward, with analysts viewing the acquisition as expensive.

Ball Aerospace makes ‘mission critical space systems’ and produces ‘defence technologies across air, land and sea’.

The purchase will also align BAE Systems further with ‘the US intelligence community and department of defence’s highest priorities.’

Ball Aerospace is headquartered in Colorado, with more than 5,200 employees of whom 60% hold US security clearances.

Parent company Ball Corp (BALL:NYSE) says it will use the proceeds of the sale to cut its $9.7 billion debt pile and return money to shareholders.

SHARE BUYBACKS

Defence behemoth BAE Systems also confirmed the deal is consistent with its capital allocation policy and allows the FTSE 100 company to continue with a share buyback, equivalent to around 5% of the market cap, that was announced on 2 August alongside first half results.

BAE will start its £1.5 billion share buyback scheme (over three years) once the current buyback completes.

Share buybacks amounted to £376 million in the first half of 2023, reflecting repurchases under the £1.5 billion share buyback programme that started in July 2022.

In total, £884 million has been returned to shareholders through share buybacks and dividends in the period.

BAE Systems shares climb 5% after first half results beat expectations

EXPERT VIEWS

Analysts at Jefferies were positive about BAE Systems’ latest purchase, pointing out Ball has ‘an appealing positioning on space’ and ‘should reinforce BAE’s electronic solutions, two core areas of M&A focus for the group’, though they viewed it as slightly expensive.

In early August, Quilter Cheviot analyst Jarek Pominkiewicz expressed doubts over a deal of this kind with Ball Aerospace, given how expensive it would end up being for BAE.

In a note out today, Jefferies said: ‘The deal is worth $4.7 billion, net of $750 million tax benefits, to be financed by cash on hand and new debt and expected to conclude in the first half of 2024.’

The broker estimates sales of $2.2 billion for Ball in 2023, with a 10% RoS (return on sales) and 10% CAGR (compound annual growth rate) over the next five years with margins expected greater than 12% including synergies.

STRONG HALF YEAR RESULTS

BAE reported a strong set of results for the six months ending 30 June 2023.

Underlying earnings before interest taxation (EBIT) increased to £1.25 billion from £1.11 billion year-on-year, giving a steady return on sales of 10.5%.

Sales in the first half increased by £1.4 billion to £12 billion, an increase of 11% on a constant currency basis lifted by the ongoing crisis in Ukraine and a ‘strong order intake’.

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