LONDON — Rising US electronic warfare requirements along with the opportunity to fill gaps in its capabilities in the sector were behind a move last week by Ultra Electronics to make its biggest ever acquisition — Kratos Defense & Security's Electronic Products Division (EPD), according to the British company's CEO, Rakesh Sharma.
Ultra announced June 1 it was paying up to $265 million to buy out the designer and producer of radio frequency and microwave integrated systems and subsystems used in many of the US military's key programs, including like the P-8A Poseidon maritime patrol aircraft, the Trident nuclear missile and the EA-18G Growler.
That sort of acquisition number price may almost be small change to the Lockheed Martins and BAE Systems of this world, but to a mid-cap British company with a turnover last year of £713 million (US $1.08 billion) it's a lot of money to finance out of existing facilities.
The move has drawn the firepower of the normally acquisitive British company and only a couple of other small purchases are being looked at for the moment.
"We are unlikely to do anything sizeable for the next 12 to 18 months but we do have some targets in the pipeline," Sharma said. ...."We have an interest in a couple of bolt-ins, where we can combine them with an existing business, these type of investments tend to be around the £5 [million] to £10 million mark and we may do something like that."
Last year Ultra acquired a string of small companies, mostly in North America, including Forensic Technology of Canada, 3 Phoenix and ICE.
Even without the addition of the Kratos EPD business, North America already dominates Ultra revenues, accounting for 44 percent of sales last year with the Pentagon being its biggest single customer.
Nick Cunningham, an analyst at agency partners in the UK, said that while there have been budget issues in the US, it's still the place for companies like Ultra to invest their money.
"It makes perfect sense. You go where the money is, and the US still accounts for 50 percent of the addressable defense market worldwide," Cunningham said. "Whichever version of the FY 2016 US defense budget gets approved, it is still going to have more procurement in it than FY 2015, and it will grow after that as well. Ultra are probably picking up on the EW market at a spending low."
Sharma, though, said Ultra has been looking to make a sizeable investment in the EW market for a long time as the company was under-represented in the sector.
"Although we were interested in the segment, trying to find the right asset at the right time is the thing that's difficult," the Ultra boss said. "It was just a confluence of circumstances where Kratos needed to divest their asset, and we were in a position where we were looking for something larger, and this was a perfect size as we were able to do it out of our free cash flow and debt."
Kratos said its sale of EPD, formerly known as Herley Industries before it was acquired by Kratos, was undertaken to control debts.
While it's a big acquisition for Ultra, Sharma reckons it will be worth it. though and He pointed to the fact that while the US defense budget overall may being growing at only 1.5 percent, the electronic warfare sector, in part prompted by the expansion policies of China and Russia, is growing at more than 3 percent — and the international market is moving ahead at double that rate.
"The US has publicly declared it wants to get back to the sort of supremacy of the airwaves that it enjoyed in the Cold War, so the amount of investment going into EW is starting to rise," Sharma said.
Cunningham reckons that while production of some of the platforms EPD supplies will come to end fairly quickly, there is going to be a large appetite for upgrades resulting, in part, from advances by rival nations.
"I think we are going to see a lot of EW upgrades," the analyst said. "One of the big lessons to come out of the Ukraine is the Russians are very good at EW, and that's something we have to think a lot about now. I suspect we will find the Chinese aren't nearly as good, but they will catch up."
One immediate target that Ultra boss is taking aim at is the F-35, where Sharma said he expects prime contractor Lockheed Martin to favorcome out for competition for certain systems in order to drive down costs.
"We believe there will be certain systems that will come out for competition, and bits of the EW suite will be one of them," Sharma said. "Sub-systems, very fast synthesizers, very low-noise amplifiers, the sorts of things that fit into a wider system without requiring full qualification will come out to competition."
EPD will become part of Ultra's Tactical & Sonar Division and renamed Ultra Electronics Herley Industries. Richard Poirier remains as president.
The Kratos-General Microwave Israel and Kratos GMI-Eyal businesses operated by EPD are not part of the sale to Ultra.
Email: achuter@defensenews.com
Andrew Chuter is the United Kingdom correspondent for Defense News.