Leonardo's Strategic Avio Stake Reallocation and Capital Deployment: Evaluating Investment Rationale and Timing

Leonardo SpA's decision to divest a 9.4% stake in Avio SpA, reducing its ownership to 19%, marks a pivotal moment in the aerospace and defense sector. This €400 million capital raise, part of a broader strategy to bolster Italy's space industry, has sparked significant debate among investors. While Avio's stock price plummeted 8.7% post-announcement, the move reflects Leonardo's intent to reallocate resources toward high-growth opportunities in launch systems and defense programs, as the Bitget article notes. This article evaluates the investment rationale and timing for capitalizing on Avio's post-transaction valuation dynamics, balancing its financial performance, strategic partnerships, and industry positioning.

Strategic Rationale: Capital Reallocation and Sector Expansion

Leonardo's stake reduction is not merely a liquidity play but a calculated step to optimize its portfolio. The proceeds will fund the full exercise of subscription rights for its remaining Avio stake, part of a €400 million capital increase approved by Avio's shareholders on October 23, 2025, as the Leonardo press release states. This capital infusion aims to accelerate Avio's expansion into the U.S. defense market and enhance European manufacturing capabilities. The 90-day lock-up period for Leonardo's remaining shares further signals its commitment to long-term growth, mitigating short-term volatility concerns, as the Leonardo press release notes.

Financial Performance: Strong Fundamentals Amid Transition

Avio's financials underscore its resilience. In Q2 2025, the company reported a 30% year-over-year revenue increase and a 55% surge in EBITDA, driven by robust demand for propulsion systems, as the Investing.com earnings call transcript notes. Its order backlog stands at €1.7 billion, with an additional €200 million added post-reporting, reflecting sustained market confidence, as the Investing.com earnings call notes. These metrics suggest that Avio's core operations remain robust despite the share sale. However, the immediate 8.7% stock price drop highlights investor skepticism about the timing of the divestment, particularly as the capital increase is set to settle on October 31, 2025, as the Leonardo press release notes.

Valuation Dynamics: A Premium Justified?

Avio's valuation metrics post-transaction raise critical questions. Its P/E ratio of 107.7x far exceeds the peer average of 19.9x and the European Aerospace & Defense industry average of 32.5x, as the SimplyWall Street valuation page shows. Similarly, its EV/EBITDA ratio of 51.2x is among the highest in the sector, as the SimplyWall Street valuation page shows. While Leonardo's P/E of 27.2x offers a more moderate benchmark, Avio's premium valuation appears disconnected from its current financial performance. This disconnect may reflect optimism about its future growth, particularly its strategic partnership with Raytheon to establish a U.S. solid rocket motor facility, as the Euro-Sd news reports.

Strategic Partnerships: A Catalyst for Growth

Avio's collaboration with Raytheon to build a vertically integrated SRM facility in the U.S. is a game-changer. This partnership, building on a 2024 contract for the Mk 104 rocket motor, positions Avio as a key supplier for U.S. defense systems, as the Euro-Sd news reports. The facility will provide Raytheon with preferred access to production capacity, aligning Avio's capabilities with the U.S. military's growing demand for advanced propulsion technologies, as the MarketWatch article notes. Such strategic alliances could justify Avio's elevated valuation if they translate into sustained revenue growth and market share gains.

Investment Timing: Navigating Risk and Opportunity

The timing of an investment in Avio hinges on reconciling its high valuation with its growth trajectory. While the P/E and EV/EBITDA multiples suggest overvaluation, Avio's strong order backlog, EBITDA growth, and U.S. market expansion efforts indicate a company poised for long-term gains. Investors must weigh the immediate risk of volatility-exacerbated by the recent stock price drop-against the potential for outsized returns if Avio's strategic bets pay off. The lock-up period for Leonardo's remaining shares and the completion of the capital increase by year-end 2025 could stabilize the stock, offering a clearer entry point for investors.

Conclusion

Leonardo's Avio stake reallocation is a strategic move to fuel Italy's aerospace ambitions, supported by Avio's strong operational performance and high-impact partnerships. While the company's valuation multiples appear stretched, its growth drivers-particularly in the U.S. defense sector-could justify the premium. Investors should monitor the capital increase's execution, the Raytheon facility's progress, and Avio's ability to convert its order backlog into consistent revenue. For those with a long-term horizon, Avio's post-transaction dynamics present a compelling case, albeit with caution warranted due to its current valuation disconnect.