US conglomerate Ball Corporation (NYSE:BLL) is mulling over the sale of its aerospace division, according to Reuters and others.
Among the interested parties, BAE Systems PLC (LSE:BA.) has publicly indicated its intention to expand its presence in the space sector - a focus for the Ball unit. So, the UK group's interest is a given here.
However, research from Citi, the American bank, suggests that the cited $5 billion potential sale price may not offer an optimal return for BAE Systems.
According to the market forecasts, earnings before interest, taxes, and amortisation (EBITA) for Ball Aerospace in 2023 is projected at $215 million, increasing marginally to $227 million in 2024.
Based on these figures, the potential acquisition would mean 23 times the current-year enterprise value (EV) to EBITA ratio, and 22 times the 2024 EV to EBITA ratio.
In comparison, BAE Systems currently has an EV to EBITA ratio of 12.1 for 2023 and 10.9 for 2024.
In simpler terms, the EV to EBITA ratio is a measure of the return on investment that a company can expect from an acquisition.
A lower ratio generally indicates a more cost-effective investment.
Thus, the significantly higher EV to EBITA ratio for Ball Aerospace's acquisition suggests a potentially lower return on investment for BAE Systems compared to its current financial position.
Citi's research indicates that unless the acquisition results in significant synergies — such as doubling Ball Aerospace's profits — or displays strong growth beyond 2024, other capital deployment options, such as continued share buybacks, could provide a better return on BAE Systems' capital.
Despite BAE Systems' ambition to expand in the space sector, the findings of Citi's report underline the importance of financial due diligence in weighing the potential benefits and drawbacks of such a large-scale acquisition.