Not close -- and no cigar, either. That appears to be the outcome for my prediction that Ball Corporation (BALL 1.02%) would be able to secure an $8 billion sales price for its underperforming Ball Aerospace division, which the can manufacturer put up for sale in June.
Had Ball succeeded in making this sale, at this price, the cash windfall would have been big enough to nearly pay off Ball's $9.6 billion net debt load. Now, Ball will be lucky to pay off just half its net debt. Ball has a total debt load of $10.2 billion, against $955 million in ready cash.
That's the long and short of this story. On Thursday last week, Ball announced that after reviewing offers from several bidders, it has decided to sell its space division, Ball Aerospace, to Britain's BAE Systems (BAES.Y 0.15%). The British defense contractor will pay Ball $5.6 billion for the space subsidiary. And after paying taxes on the proceeds, Ball will be left with just $4.5 billion in cash.
And as we now know, not even all of that cash will be going to pay down debt.
What the deal means to Ball Corporation
Ball expects to close its sale of Ball Aerospace to BAE sometime in the first half of next year. Post-divestiture, Ball says it will be left as a "focused, high-margin global aluminum packaging leader" -- no longer lugging along an incongruous aerospace division on the side.
Part of the money from Ball Aerospace's sale will go to pay down Ball's debt to "approximately 3.0x" earnings before interest, taxes, depreciation, and amortization (EBITDA). Analysts polled by S&P Global Market Intelligence estimate Ball's 2023 EBITDA at just under $2.2 billion, so three times that figure would be about $6.5 billion. Thus, the plan appears to be to spend about $3.7 billion of the $4.5 billion remaining from the sales price after paying taxes on debt reduction.
As for the remaining $800 million or so of post-tax proceeds from selling Ball Aerospace, Ball says this will be spent on "capital return to shareholders via share repurchases and dividends." (Dividend investors should be happy to hear that, at least. At present, Ball pays its shareholders only 1.5% -- about 20 basis points below the average payout on the S&P 500).
What the deal means to BAE Systems
But what about BAE Systems, the presumed new owner of Ball Aerospace -- absent the start of a bidding war over Ball Aerospace? If Ball isn't getting as great a deal as I had hoped for Ball Aerospace, does this mean that BAE Systems is getting a steal of a deal?
Not quite.
As Ball explains in its press release, BAE is picking up Ball Aerospace for a price of 19.6 times trailing EBITDA. Yet BAE Systems stock itself sells for only 10.6 times trailing EBITDA. So by one metric, at least, BAE is paying a valuation nearly twice that of its own stock to acquire Ball Aerospace.
And by some other metrics, as well. For example, BAE is paying 32.9 times 2022 operating profit for Ball Aerospace. (BAE's own price-to-EBIT ratio is 12.8). BAE is paying 2.8 times sales to acquire Ball Aerospace. (BAE's price-to-sales ratio is only 1.3).
Long story short, if Ball isn't getting a great deal selling Ball Aerospace, well, BAE isn't getting much of a better deal buying it, either.
What BAE Systems is getting
Yet BAE Systems is getting something for the lofty premium it's paying: a dedicated space division.
According to its website, BAE Systems has been working in space "for more than two decades." But two decades' investment hasn't been enough to grow BAE Space into a business big enough to deserve its own line item in BAE's financial reports. Instead, judging from what can be gleaned from the company's 2022 annual report, what "space" business BAE has at present is split up and spread out between its cyber and intelligence and its electronic systems divisions. "Space" at BAE appears to consist primarily of providing "radiation-hardened electronics for spacecraft and satellites" -- making parts for other companies' satellites, in other words.
But perhaps not for much longer.
In 2021, BAE acquired a small, private space company called In-Space Missions, expressing an interest in developing a constellation of Azalea Synthetic Aperture Radar satellites. Bringing satellite builder Ball Aerospace in-house should help greatly with this effort, and turn BAE Systems into a true space stock in its own right, potentially able to compete with the likes of Lockheed Martin, Northrop Grumman, and Boeing in the United States.
This, in a nutshell, seems to be the reason BAE Systems wants to own Ball Aerospace -- whatever the cost.