Jonathan Engineered Solutions (Jonathan), a Levine Leichtman Capital Partners portfolio company, designs and manufactures highly engineered enclosure solutions that support mission-critical electronic equipment primarily for maritime defense applications.
Harris Williams recently advised Jonathan on its sale to JLL Partners. Here, senior bankers from the Harris Williams Aerospace, Defense & Government Services Group share insights on the transaction and considerations for investors interested in exploring opportunities within the broader maritime defense space.
What makes the maritime defense sector an appealing space for buyers and investors today?
Rogers: Generally speaking, threat levels are the primary drivers of defense spending, and today's global threat environment is heightened and diverse. For the last two decades, conflicts in the Middle East had emphasized ground combat and asymmetric warfare. Now, the focus has shifted to peer and near-peer threats across the Pacific. Maintaining naval superiority is a key tenet of the U.S. Department of Defense's strategy. As such, expansion and modernization of the U.S. Navy fleet is a vital defense funding priority going forward.
Smith: This expansion and modernization emphasis creates a two-pronged demand dynamic for suppliers. As construction is underway to grow the fleet, suppliers are ramping up to support a highly visible new ship production schedule across the next 10-plus years. Meanwhile, existing naval platforms are often decades old, but systems onboard must be continuously refreshed with the latest equipment and technology. This enduring replacement cycle generates recurring demand for replacement products, as they are swapped out with every refresh. So long-term demand fundamentals are strong for maritime defense suppliers, both in the original equipment market and aftermarket.
Rohman: Another important element is the cost of these products, which is often very small relative to the value of the systems they support. Product performance and dependability are paramount when failure of the product, and thus the system, could jeopardize the mission, the ship, and the personnel onboard. So once products are proven to withstand the extreme duress of their operating environment, it is challenging to displace that supplier on that particular position. The cost of failure is just too high to risk introducing a new supplier.
Kinard: We also see a significant opportunity to modernize the supply chain through consolidation and further professionalization. The current naval supplier base is heavily fragmented, with many small suppliers manufacturing single product lines or supporting specific platforms. The Navy is eager to streamline its supply chain to better support the pending ramp in production. That means there is significant value in suppliers of scale that have diverse capabilities and can serve as a platform for further consolidation.
What made Jonathan particularly appealing to its investors?
Rogers: Jonathan considers itself the gold standard in ruggedized equipment that can withstand harsh environments onboard naval vessels. Their products protect the command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) equipment that acts as the "eyes and ears" of the ship. So, the market tailwind of sustained Navy investment in new ships and ship modernization supports Jonathan. The company has predictable demand, which is driven by the three- to five-year replacement cycle on C4ISR equipment.
Smith: Through several strategic acquisitions, Jonathan has built a broad platform capability and is one of the only suppliers of scale to provide a breadth of complementary products, whereas many of their competitors are single-product and single-market focused. The Navy and its tier-one suppliers are looking for ways to simplify their supply network. Rather than working across multiple component manufacturers to design a new enclosure system, customers can rely on Jonathan to create a comprehensive solution on a highly efficient timeline.
Kinard: The company’s long-standing history and deeply experienced management team were also important considerations. Jonathan has been supplying components for the Navy for over 65 years. They maintain a library of thousands of proprietary designs they can leverage when creating a new qualified product. These high-performance products are deeply embedded within the systems they support, and Jonathan often works directly with the Navy when designing new products. With that dynamic, Jonathan engineers often collaborate with the Navy before it has awarded a contract to its defense contractors. In such instances, Jonathan may be chosen as a sole-source supplier regardless of which defense contractor wins the work.
Rohman: I would also add that, while Jonathan is primarily focused on the maritime defense industry, significant opportunity exists in other ruggedized end markets. These include commercial aerospace and advanced industrial applications, in which there is strong demand for highly reliable slides, isolators, and enclosures.
What advice do you have for prospective buyers interested in this space?
Smith: Suppliers that can participate in the Navy's fleet expansion and modernization are well positioned for significant long-term growth. We expect to see demand across both original equipment and aftermarket segments. On the aftermarket side, buyers should look for recurring demand characteristics and entrenched positions.
Rogers: In many ways, the characteristics investors are looking for in maritime defense are similar to what they would seek in other highly regulated end markets like commercial aerospace. Buyers are seeking proprietary, highly engineered content on well-funded, long-life programs where there are opportunities to continually supply products throughout the platform's life cycle.
Kinard: The defense industry is fairly specialized, so knowledge of the industry and end-market dynamics is very important. It's different than some other spaces where it's less about the industry and more about the business. Wading into it as a novice would be a big task. Coming in with an advisor or industry consultant who can bring knowledge on the space is important. But M&A opportunity abounds, with steady, visible demand and attractive consolidation opportunities.