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The aviation and defense end markets have been a source of strength for Honeywell (HON), which manufactures engines, power systems, navigation hardware, and a vast array of components for military equipment in its Aerospace Technologies segment. With this morning's $1.9 bln acquisition of CAES Systems Holdings from private equity firm Advent International, HON is looking to capitalize even further on the strong demand trends within the defense sector.

• The addition of CAES will bolster HON's defense and space product portfolio, particularly in end-to-end radio frequency signal management, radar, and sensing technologies. These components will not only open up new revenue generation opportunities, but they'll also enable HON to upgrade and improve current programs, such as its F-35 fighter jet and Advanced Medium Range Air-to-Air (AMRAAM) missile systems.
• Therefore, acquiring CAES provides HON's Aerospace Technologies segment with another growth catalyst. In Q1, organic sales growth increased by 18% in that segment, with the defense and space markets growing by 16%.
  • Supply chain improvements allowed HON to more fully capitalize on the robust demand trends, which are expected to remain strong due to the conflicts in Ukraine and the Middle East.
• However, given HON's sheer size, this acquisition likely won't move the needle much, at least in the near term. For some perspective, HON is expected to generate nearly $39 bln in revenue in FY24. Also, while the press release was short on details regarding CAES' financials, HON did disclose that the buyout price represents approximately 14x estimated 2024 EBITDA on tax adjusted basis.
  • This indicates that CAES is expected to achieve EBITDA of about $135 mln in FY24, which is a relative drop in the bucket for HON.
  • Still, HON expects the acquisition to be accretive in the first full year of ownership. The fact that this is an all-cash deal certainly helps in that regard.

Overall, while not necessarily a game-changer, this looks like a solid acquisition from both a strategic and financial standpoint. HON bolsters an already strong defense business, diversifies its revenue streams, and does so at a reasonable price that doesn't require issuing new debt or equity.