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Top 3 SPAC Targets – Defense
by Nicholas Alan Clayton on 2022-03-04 at 7:47am

SPACInsider contributors Anthony Sozzi and Sam Beattie this week compiled their three favorite potential SPAC targets among companies in the defense sector. We look at why they are compelling and why each could be a fit for a blank-check merger.


Whoever for some reason wished on a magic lamp for one more black swan event evidently got their wish this week. The result is a resetting of all sorts of market expectations and while this war is truly bad for everyone, it is also likely to shift SPAC attentions towards defense, a sector where they have been hitherto less active.

Globally, defense and aerospace companies actually experienced a revenue contraction of 8% in 2020, in large part due to the civilian side of these businesses in commercial aviation. Even allowing for that, the top six US defense contractors notched meager revenue growth of 2% in 2020 while their top five European counterparts saw revenues sit flat, albeit with some increases in operating profits, according to a PwC report.

That came despite steadily rising defense spending by governments amounting to a record $1.83 trillion that year. Now, that gradual rise is expected to experience a major jolt upwards with an ongoing land war in Europe and a continent newly willing to re-arm itself.

The crisis has been enough to shake Germany out of 77 years of official anti-militarism following WWII and it alone has allocated €100 billion ($110.6 billion) to upgrade its forces to adjust to the new geopolitical realities. Just this increase represents about 6% of all global defense spending in 2020. Also, nearly every European country has offered some form of military aid to Ukraine, coming out of stocks that will need to be replenished.

Nonetheless, the closest that SPACs have gotten to the sector in recent years has been through cybersecurity and aerospace companies that serve government clients in most cases as a minority portion of their business. The defense sector has plenty of things SPACs love, however. Many have their revenue tied to long-term, high-visibility contracts with clients in the form of national governments that are unlikely to default or renege once it’s budgeted.

Anduril

While the lion’s share of this work is already handled by a relatively small number of large, already-listed defense contractors, warfare is always changing and many independents are developing technology that could prove to be the next critical innovation.

Much of this is not unlike the challenges civilian businesses are dealing with – “We have an unfathomable amount of data coming at us in real time, what do we do with it?”

Irvine, California-based Anduril uses its Lattice operating system to autonomously guide military assets like drones via AI while also allowing users to manage the swarm of connected machines in a battle space via augmented reality.

To give this system more eyes on the battlefield, Anduril also has its own line of drones designed to be cheap, disposable or re-usable. These Altius drones can be launched from missile tubes by helicopters or ground vehicles in sizes ranging from 15 lbs. to 90 lbs. to give 3 to 15 hours of coverage in a given area. Its DIVE-LD underwater drones provide similar capabilities for coastal areas.

Its Anvil system provides the other side of the coin as a real-time threat assessment and specifically anti-drone network. One of the problems with countering drones is that they are typically cheaper to make than the missiles that would intercept them. Anvil avoids this cost discrepancy by utilizing hard-nosed reusable drones that ram enemy drones out of the sky before returning to post for re-use.

Beefing up the brains of this system is founder Palmer Luckey whose last stop was as a co-founder of Occulus. Its $450 million Series D raised in July 2021 bumped its valuation up to $4.6 billion and was led by angel investor Elad Gil, a former investor and executive at Twitter (NYSE:TWTR) and Google (NASDAQ:GOOGL).

The company also brought in Christian Brose as chief strategy officer, who formerly served as staff director of the Senate Armed Services Committee and personal advisor to the late Sen. John McCain.

This suggests that Anduril is not setting itself up to be an acquisition target by one of the major defense contractors, but rather to be a major contractor on the tech side in its own right with the legislative connections to hold its own seat at the table.

Wright Electric

But, as the late Gen. Omar Bradley once said, “Amateurs talk strategy. Professionals talk logistics.”

There is simply too much stuff and people to be moved around in a modern military and like the rest of the world, the US military is gradually going green. On some level, electricity is a more easily securable and sustainable military resource, but it presents its own challenges in displacing the heavy duty work that military currently turns to diesel and jet fuel for.

We’ve already seen SPAC deals with small electric aircraft – eVTOLs specifically – but those have largely been tools for the very different job of urban mobility. These would replace taxis or public transportation in getting four to six passengers to locations more quickly.

The military needs a much heavier lift, which Wright Electric is working on. It has developed electric motors and inverters for medium-sized electric and hybrid jets. By 2026, it expects it could put a four-engine 100-passenger jet into service.

On the civilian side, this could serve 1-hour flights and could potentially be preferrable option as a much quieter solution for noise-sensitive cities and neighborhoods. But it is already working with both the US Army Airforce as a means of moving service members and equipment around America’s constellation of bases more sustainably and efficiently.

One way or the other, Wright Electric has secured many of the perceived prerequisites for a SPAC deal in this space. It has already partnered with easyJet (LON:EZJ) to develop commercial aircraft, and this partner would likely be a offtaker of the company’s first models. It has also been hired by the US Department of Energy to develop designs for an electric 186-seater airliner with a range of 800 miles.

Leonardo DRS

This could also be a moment when SPACs could decide to target a traditional defense contractor as well. Very few of these remain wholly private and Leonardo DRS is among the few targets that is not so closely related to a specific nation to be considered a protected strategic enterprise.

It is the military electronics division of Italian defense contractor Leonardo sPa (MI:LDOF). Leonardo attempted to IPO this US-headquartered branch in March of last year, but pulled it citing market conditions.

Like Anduril, it focuses primarily on the communications and command-and-control elements of military operations. But, it also produces a fair amount of standard hardware for NATO armies across a wide range that includes cockpit instrumentation, naval guns and communication arrays of all types.

The IPO would have valued the subsidiary at about $807 million, but the market today is a new one. One of the baked-in benefits of a SPAC deal is certainty that a listing will close within a certain frame of time, particularly when supplemented by PIPE investments that the parent Leonardo would likely have strings to pull on in lining up.

Leonardo itself is up 20% in the Milan market since February 23, when the Ukraine crisis appeared poised to deepen. But, it could benefit from exposure to the more liquid US exchanges as more capital cycles towards the defense sector overall.

Any of these three targets would logical potential targets for New Vista (NASDAQ:NVSA), which raised $276 million in its February 2021 IPO and is led by long-time Boeing (NYSE:BA) executive Dennis Muilenburg. Three other SPACs are currently searching with a focus on aerospace, which heavily overlaps with defense, in Parsec (NASDAQ:PCX), Endurance (NASDAQ:EDNC) and Pine Island (NYSE:PIPP).

 

 

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