Air security firms likely to boost sales, deals

ATLANTA (Reuters) – The renewed focus on aviation security is likely to boost sales for providers of whole body imagers and other detection equipment and spur mergers and acquisitions in the sector.

The failed Christmas Day attempt to blow up a U.S.-bound airplane has spurred increased orders worldwide for detection gear and baggage-scanning devices. For example, Britain introduced whole body imagers at Heathrow airport on Monday.

The higher demand will benefit companies such as L-3 Communications Holdings Inc, OSI Systems Inc, American Science & Engineering Inc and Analogic Corp.

“All countries are taking a much closer look at this particular technology and also other methods to address this kind of threat,” said Brook Miller, a vice president at Smiths Detection, a unit of Britain’s Smiths Group Plc that supplies X-ray machines and other detection equipment to airports.

Smiths Detection is seeing increased interest not only in its body imaging product that is undergoing U.S. lab testing but also in its overall suite of aviation-security products, and it expects its $800 million-a-year business to grow.

“We anticipate this (rising interest) pushing our commercial options a little bit further, a little bit faster,” Miller said.

L-3 and OSI Systems, currently the only two qualified vendors for whole body scanners to the U.S. Transportation Security Administration, told their earnings conference calls last week that increased sales of the devices, which have raised privacy concerns since they can see through clothing and spot hidden items, provide upside to revenues this year.

“There’s really been no bust for most companies” following the increase in demand for infrastructure security products that came after the September 11, 2001, hijack attacks, said Tim Quillin, an analyst with Stephens Inc.

“There’s plenty of things to worry about which will drive long-term demand for security products,” he added.

Quillin said a body imaging system from American Science & Engineering is also likely to gain TSA certification because it is similar to OSI’s product.

ACQUISITIONS COULD COME

At the same time, the move to more rigorous screening measures could also drive mergers and acquisitions in aviation security, a market made up of a few larger players and other smaller companies.

“I think we are in the beginning stages of a re-acceleration in the consolidation of the defense markets,” said Michael Lewis, senior vice president for BB&T Capital Markets Equity Research.

Stifel Nicolaus analyst Stephen Levenson said American Science & Engineering and Analogic could either initiate or be on the receiving end of aviation security deals.

“They both have plenty of cash available and they could both be targets — or they could be buyers if they find the right technology and the transaction that makes sense,” Levenson said.

BB&T’s Lewis said L-3 could play the role of consolidator in a bid to gain market share. L-3 has already stated it is looking for acquisitions in areas such as systems that gather and monitor defense intelligence.

“L-3 has the financial wherewithal to be able to reach deep into its pockets and invest in an area where it sees great opportunity,” Lewis said.

“As a result of the expected increases that we should see in this (security) area, I think L-3 has a great chance to take additional market share versus its pure competitors.”

(Reporting by Karen Jacobs, editing by Gerald E. McCormick)