On November 19th 2024, US-government-contracted Aerovironment (AV) announced its acquisition of BlueHalo (BH), a US-based drone swarm technology firm, for $4.1bn in an all-stock deal set to be the largest of its kind in recent times. This acquisition comes at a time when the Russia-Ukraine conflict is escalating daily, which is particularly notable as Aerovironment is already heavily involved in supporting the Ukrainian defence effort through its unmanned aerial systems (UAS). Given the immediate success of BlueHalo in UAS technology (reaching nearly $1bn in annual revenue since being founded in 2019), AV has acquired a valuable target which enhances its drone technology offerings, and will work with the US Army to synergise drone swarm technology with conventional ground armed forces.
Buy-side firm Aerovironment was financially advised by RBC Capital Markets and received legal counsel from Latham & Watkins LLP. On the sell-side, BlueHalo sought J.P.Morgan for financial advisory services and legal advisory from Goodwin Proctor LLP. The notoriety of the advisory firms evidences the scale and importance of this deal, which is expected to close in the first half of 2025 subject to regulatory approval.
Aerovironment is currently valued at around $5.5bn by the market, meaning that the market capitalisation of AV is only 34% higher than the price it will pay for BlueHalo, a surprising element of this deal. AV is set to issue roughly 18.5m shares to equity-holders in BH, which accounts for an approximately 40% stake in the combined firm. Of that 40%, Arlington Capital Partner will remain a sizeable shareholder of BlueHalo and, hence, the combined firm. AV's shareholders will own the remaining 60% of the combined firm.
This valuation is predicated upon the expected synergies from the combined firm, expecting to generate $1.7bn in revenue. Currently, BlueHalo generates $900m annual revenue to AV's $720m, presenting a unique scenario whereby the target firm generates more revenue than the acquirer. Aerovironment, however, has been consistently profitable and has established a strong reputation over its 53-year lifespan, winning multiple government contracts. Such as in August 2024, when the firm won a $1bn contract with the US government surrounding its Switchblade loitering munitions, which this deal enhances.
Switchblade loitering munitions, also referred to as "kamikaze drones", are developed by Aerovironment and rely heavily on modern technology, strapped with explosives, to precisely strike the desired target. The addition of BlueHalo into the development of drone swarm technology should prove to increase the effectiveness of AV's offerings.
Drone swarm technology will help shape the "next generation" of battlefield technology, it has even already been implemented in certain operational theatres. The most relevant of which being the Ukraine war, which has seen extensive use of UAS' in both reconniassance and combat. Given that the conflict in Ukraine is ramping-up, it is likely AV would benefit from greater US involvement in the war. On the other hand, with Trump now set to enter the White House in January 2025, the president-elect has stressed the importance of ending the conflict and boasts about his diplomatic relationships with both nation's leaders. Therefore, an end to the war could now be more likely than before the election, which could dampen the requirement for AV's technology and reduce the revenue that the firm is able to generate.
This could, in part, explain the initial investor reaction, which prompted a 2% fall in the value of AV's stock (NASDAQ: ADAV). This reflex comes in spite of AV's expectation that this deal will be adjusted-EBITDA and non-GAAP EPS accretive. Since this immediate reaction, investors have, rightly so, dialled back their skepticisms and the stock has retaken the lost value. Investor's have, too, addressed concerns with the valuation of BlueHalo, although BH was bought at a much lower valuation than AV's market value, indicating an overvalued AV or an undervalued BH.
This transaction is a timely, sizeable, and impactful deal on the defence industry, especially within the drone swarm sub-sector of the market. The combined firm is well-poised to succeed in winning more government-contracts, likely under a higher defence-budget in the US, through delivering highly-competitive and effective drone technology.
Written by: Alexander Philp
Sources: MergerLinks, DefenseNews, Yahoo Finance, Press Releases
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