Top 3 SPAC Targets – Next-Gen Defense
SPACInsider contributors Anthony Sozzi and Nic Narang this week compiled their three favorite potential SPAC targets among potential targets in the defense sector. We look at why they are compelling and why each could be a fit for a blank-check merger.
Steady increases in US defense spending have been a bankable prediction for some time. But, the roster of potential friendly government clients outside of the US for companies developing cutting edge defense technology has not always been deep.
Russia’s invasion of Ukraine, which crossed into its second year last week, changed all that. McKinsey now predicts that European defense spending could increase as much as 65% through 2026 to about $517 billion in response to the war.
There’s plenty of opportunity for new vendors to sneak in on that action as well. the McKinsey report notes that allied European militaries employ 172 different weapons systems in major categories as compared to just 32 in the case of the US. In many cases, the local suppliers of some of these smaller existing European systems lack the scale to rapidly ramp up to new demand and contracts could be up for grabs.
France, for one, is boosting its military budget by 7.4% year-on-year to about $42.2 billion in 2023, a part of a gradual 36% increase in its defense spending since 2017. About 58% of this is slated for procurement of new tanks, planes and naval vessels, but France is also boosting its military intelligence budget by 60% over the next seven years.
This is slated to take the form of investment in the new eyes and ears of modern warfare – drones, cyber-defense and air defense. France plans to hire 1,500 more uniformed and civilian personnel for these areas, and these moves are emblematic of broader trends in budgets across the continent.
After two decades of mismatched warfare between high-tech western militaries and low-tech insurgencies in the Middle East, the Russia-Ukraine war between conventional forces of similar technical levels is demonstrating that these are areas of acute unmet needs in the West.
The allied rearmament is not only happening in Europe, though. With both China and North Korea acting increasingly assertive in Asia amid the crisis, Taiwan is increasing its military budget by double digits and Japan plans to boost its own by 60% over the next five years.
For the old school hardware that is set to be purchased amid this rearmament, iNRCORE could make for an intriguing play on the public markets.
The major defense contractors whose names are primarily associated with high-profile arms systems are generally either already public or scaled and comfortably private. But, Bristol, Pennsylvania-based iNRCORE supplies power and communications components to many of those headline tanks, planes and helicopters.
Its generator, flight control, navigation and display systems are integrated in the F-35, F-18 and F-16 aircraft programs, as well as that of America’s main battle tank, the M1Abrams and its workhorse helicopter, the UH-60 Blackhawk.
Many of these systems have been in the news lately as arms the US and its allies will be donating to Ukraine in the near term. Abrams tanks are already on the way and F-16s are rumored to be next. Combat wear and tear will increase component demand, and the countries doing the sending will have to restock their own arsenals.
iNRCORE has not been afraid to diversify beyond the defense industry, however. In October, it released a modified single-channel battery management system to serve as transformers for EVs, data centers, solar power, and utility energy storage systems.
It has also been adding to its portfolio inorganically since it was acquired in a leveraged buyout by private equity firm Jordan Companies in February 2020. iNRCORE tucked in Bicron Electronics and Gowanda Electronics later that year, and added on Vanguard Electronics last May. With these value-adds made and a news cycle that is likely to continue to be bullish towards defense, Jordan could see now as the right time to feel its way to the exits.
But, while both sides in the conflict continue to try and rush new heavy equipment to the front, drones have once again emerged as a threat that needs to be constantly utilized and mitigated on the battlefield.
After early struggles, Russia bought up Iranian drones systems that send whole swarms of small drones capable of penetrating Ukraine’s air defenses. Ukraine has meanwhile turned a largely donated and internally modified fleet of small commercial drones to add extra terror to the trench warfare on the Eastern Front, using them to correct accurate artillery fire on enemy positions or stalk small units and drop grenades on them from above.
The need for further sophistication in this arena is clear and San Diego-based Shield Ai is working to bring greater intelligence to drone fleets. Its V-BAT drone model is among the few drones of its medium size of about 125 lbs to be able to take off and land vertically while carrying at 25-lb payload and reaching altitudes of up to 20,000 feet.
On the smaller side, its Nova 2 drone looks similar to the sorts of drones now commercially available to consumers, but it is in reality much scarier. Designed to autonomously scan and map the interiors of buildings, it can quickly clear rooms or identify enemies either individually or as a swarm.
The autonomy in the system is key, and Shield AI has been working to create collective AI processing for drone fleets using its software it calls Hivemind. Hivemind has successfully piloted individual drones autonomously since 2018, and can now increasingly work as a force multiplier on the battlefield rather than requiring individual drone operators for each asset in the air.
To be had in a SPAC deal, Shield AI will likely require a team with the capital and vision to match it, however. It has raised $575 million in outside funding to date and was last valued at $2.3 billion. Hennessy VI (NASDAQ:HCVI) could be a fit as its experienced team raised $340 million to hunt for a next-gen industrial technology firm valued at over $1 billion and has until October 1 to seal a deal under its current deadline.
For investors hoping to capitalize on the shift towards intelligence that countries like France are undertaking, HawkEye 360 should be on the radar.
Herndon, Virginia-based HawkEye 360 has developed a unique means of mapping radio frequencies for communication, navigation and other purposes from space. On the civilian side, this can help organizations determine the sources of illicit maritime activity like unlicensed fishing, poaching, smuggling or piracy.
This clearly has great utility in the military sphere as well, as HawkEye 360 can track vessels and aircraft around the globe as well as individuals and groups on the ground who do not necessarily want to be found but are carrying some means of communicating with them. Even the absence of signals in a certain area can be instructive.
Shortly after Russia invaded Ukraine last year, HawkEye 360 announced that it detected areas where GPS signals were being deliberately interfered with. This proved valuable information for civilian aircraft and other services requiring GPS connectivity in the general area, but also proved a valuable tell as to where the Russians were planning to attack from.
In January, HawkEye 360 announced it had successfully deployed the first of three groups of next-gen Cluster 6 satellites via a launch abord a Rocket Lab (NASDAQ:RKLB) rocket. This de-SPAC collaboration brought HawkEye 360’s satellite fleet to 18.