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Private Equity (PE) and Venture Capital (VC) Activity in the European Aircraft MRO Market |
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(Source: Frost & Sullivan; published Dec. 13, 2006)
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VC deals have been less in number in the European aircraft MRO market because of the capital intensive nature of an aircraft MRO center. Nevertheless, there were a few notable transactions in foreign companies operating in the European region.
For example, on November 11, 2004, Desjardins Venture Capital entered into a private placement and acquired unsecured convertible debentures of NordTech, bearing interest at an annual rate of 10 percent, plus an additional annual interest of 5 percent payable until some financial objectives were achieved by the company. Later on in early 2005, the company merged with ExcelTech, creating ExelTech Aerospace.
At present, the European aircraft MRO market is in a mature phase with possible opportunities for the VCs still present in the engine and heavy maintenance sub segments, specifically in Eastern Europe.
If the market is viewed closely, it can be noted that the situation is apt for PE investors to enter the market. The latest PE deal, being the one announced by SR Technics on September 7, 2006, that it will be acquired by a consortium of three investors from the United Arab Emirates in a deal worth 1.011 billion euros ($1.3 billion). The new owners which include Mubadala Development, Dubai Aerospace Enterprise, and Istithmar will purchase more than 90 percent of the company subject to regulatory approval. The transaction is expected to be finalized by December, 2006. This deal marks the exit of the previous PE owners of the company, namely 3i Plc (a PE and VC company) and Star Capital.
Earlier in 2003, SR Technics was bought by 3i Plc, Star Capital (a PE company), and other finance partners and a small stake was retained by the old management and employees. The management buy-out was for a total of 425 million euros, making it the biggest-ever deal in the market in 2003.
With the financial backing of 3i and Star Capital in June 2004, SR Technics acquired FLS Aerospace, an aircraft maintenance company based in Dublin, for 47 million euros in cash and assumption of the pension fund deficit of 82 million euros. Another strategic deal was announced by SR Technics on March 16, 2006 to acquire the Large Aero Turbine Component Repair business of SIFCO Industries Inc., a company based in Ireland and a global leader in hot section turbine airfoil repair. The transaction was again backed by 3i and Star with a total sum of $10 million, with SIFCO substantially retaining all the existing liabilities. The deal was completed on May 12, 2006.
Carlyle Group is a leading private equity investor in the aviation industry with few of their major transactions in the aircraft MRO business. One notable transaction was when the Carlyle Group and Finmeccanica acquired Avio from Fiat Group in September 2003, for approximately 1.6 billion euros, making Carlyle acquire 70 percent of Avio. Avio performs aeroengine maintenance, repair, and overhaul in addition to producing components for aeronautical engines, accessory gearboxes, and low-pressure turbines.
On 16 August, 2006, Carlyle exited the market when British private-equity investment company Cinven Ltd. purchased Avio S.p.A. from Carlyle Group and Finmeccanica for 2.57 billion euros ($3.3 billion). The deal will be followed by a fresh Finmeccanica investment equivalent to 15 percent of Avio's equity. Likewise, in December 2001, the Carlyle Group led a $135 million investment in Aviall, investing $45 million, in support of Aviall's acquisition of the 10-year aftermarket service for Rolls-Royce T56/501-D series engine contract.
Another leading PE firm, which recently concluded a strategic transaction was Permira Funds. In October 2005, Swiss-based Jet Aviation Group's (one of the leading business aviation service companies) shares were acquired by Permira Funds for an undisclosed sum. With the backing of Permira funds, Jet Aviation acquired Midcoast Aviation from Sabreliner Corporation for an undisclosed amount in March 2006. Midcoast Aviation is a leading corporate jet aircraft maintenance, modification, and completion provider in the United States.This transaction not only expanded Jet Aviation's presence in North America, however, it also raised Midcoast's profile internationally.
At present, general demand is to carry out heavy and engine maintenance work in Eastern Europe due to the considerable low cost labor and flexible labor rates. Acting on this note is Lufthansa Technik, which has already expanded its operations in Eastern Europe to take a foothold in this market. The PE investors could look at buying stakes in independent companies or airlines affiliates positioned in Eastern Europe, which is likely to be lucrative in the long run.
Thus, the outlook for investment by VC and PE investors looks positive with opportunities currently available in the growing European aircraft MRO market.
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