middle-market repair stations – m&a...

Middle-Market Repair Stations – M&A Considerations APRIL 6, 2016

1

Key Topics For Discussion

Valuing businesses in the MRO segment

Finding the right Buyer (or Target)

Positioning key business attributes to successfully close a transaction

Driving value through an M&A process to optimize valuation

2

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” - Mark Twain

Good Judgment Comes from Experience… Experience Comes from Bad Judgment…

3

Valuation of Middle Market Companies Multiple relevant factors that influence the ultimate outcome, in both price and terms; can be monitored and managed to optimize their positioning during – and prior to – a sale process

M&A Market Conditions M&A activity in the segment Active buyers in the segment Alternate auctions/processes

Buyer Relevance Market position Limitations to competition OEM strategic actions Regulatory environment

Public Trading Valuations Flows of funds (cross-segment) Access to capital

Transaction Valuations Sponsor interest and activity Access to financing

$

1 2 3

Macroeconomic Factors Fuel prices GDP, demand factors F/X, global trade

4

Market Conditions: Activity in the Segment General Industrials M&A activity decelerated in 2015; Deal value has fallen steeper relative to number of deals; A&D deal activity has been steady

$0

$4,000

$8,000

$12,000

$16,000

0

250

500

750

1,000

Q1-11 Q2 -11 Q3 -11 Q4 -11 Q1 -12 Q2 -12 Q3 -12 Q4 -12 Q1 -13 Q2 -13 Q3 -13 Q4 -13 Q1 -14 Q2 -14 Q3 -14 Q4 -14 Q1 -15 Q2 -15 Q3 -15 Q4 -15

Dea

l Val

ue

# of

Dea

ls

General Industrial Sector

# of Deals Deal Value

$0

$750

$1,500

$2,250

$3,000

0

15

30

45

60

Q1-11 Q2 -11 Q3 -11 Q4 -11 Q1 -12 Q2 -12 Q3 -12 Q4 -12 Q1 -13 Q2 -13 Q3 -13 Q4 -13 Q1 -14 Q2 -14 Q3 -14 Q4 -14 Q1 -15 Q2 -15 Q3 -15 Q4 -15

Dea

l Val

ue

# of

Dea

ls

Aerospace & Defense Sector

# of Deals Deal ValueSource: CapIQ Data; DACIS.

5

Market Conditions: Activity in the Segment

Source: CapIQ Database.

M&A activity and Sponsor interest in the MRO segment has been steady

Closed Target Buyer Target Description

2/05/2016 Landmark Aviation BBA Aviation Provider of MRO, aircraft management, charter and FBO services

7/08/2015 StandardAero Veritas Capital MRO service provider for military and business aircraft

12/31/2014 Prime Turbines & CT Aerospace

VSE Corp. (VSEC) Supplies commercial aircraft, engines, engine parts and related services

5/21/2014 Wencor Group Warburg Pincus Manufactures, repairs and distributes aircraft parts for operations, repair stations, aircraft operators and airframe OEMs

2/6/2014 TIMCO Aviation Services HAECO Leading provider of airframe MRO services to commercial, government and military

aircraft operators in the United States

1/30/2014 Haas Group Wesco Aircraft Holdings Chemical supply chain management services provider for airlines and related MRO industries

1/7/2013 Aero Precision Industries Greenwich AeroGroup Supplies OEM systems, aftermarket aircraft spares and component overhaul to military aircraft operators worldwide

6/25/2012 Interturbine Projekt Management

B/E Aerospace (BEAV)

Supplier of consumables and electrical parts to the aerospace industry, MROs and airlines

5/24/2012 Interfast Wesco Aircraft Europe Distributes specialty fasteners and tooling for the aerospace and industrial markets

2/7/2012 AAXICO Kirkhill Aircraft Parts Company (KAPCO)

Distributes, sells and leases consumables, electronics and accessories the aviation industry

1/30/2012 UFC Aerospace Corporation

B/E Aerospace (BEAV) Provides aerospace logistics and supply chain management services

8/26/2011 Anixter Aerospace Hardware Greenbriar Equity Distributes machined components, composites hardware and electronics

7/27/2011 Satair A/S Airbus SAS Offers sales and aircraft parts distribution services to commercial operators, maintenance workshops, and various military operators

6/30/2011 Vector Aerospace Corporation Eurocopter Holding SA Provides aviation MRO services for fixed and rotary wing aircraft gas turbine engines

5/20/2011 Pattonair Exponent Private Equity Provides supply chain solutions for aerospace and defense industries

6

Market Conditions: Public Trading Valuations Sub-segments in the Aerospace & Defense market exhibit significantly different TEV/EBITDA trends

6x

7x

8x

9x

10x

11x

12x

Mar-14 Sep-14 Mar-15 Sep-15 Mar-16

Hardware & Metals Processing

Aerostructures

Machined & Cast Parts

6x

7x

8x

9x

10x

11x

12x


Airframe OEMs & Primes

Commercial Airframes

Prime Defense Contractors

6x

7x

8x

9x

10x

11x

12x

13x


Complex Systems

Components & Subsystems ex-TDG

Controls & Systems ex-Integrators

Engines & Engine Systems ex-GE

8x

13x

18x

23x

28x

33x


Interiors & Integrators

B/E Aerospace General Electric

TransDigm Zodiac Aerospace

8x

10x

12x

14x

16x

18x

20x


Specialty Defense

Defense Electr., Sensors & C4ISR

Satellites & Space Systems

Specialty Systems & Services

9x

10x

11x

12x

13x

14x

15x


MRO & Logistics

MRO, Distribution, Logistics

Source: CapIQ Database.

7

Market Conditions: Public Trading Valuations

TEV/LTM EBITDA

TEV/LTM Revenue

0.3x 0.6x 0.4x 1.0x 1.0x 0.7x 1.0x 0.3x 1.2x 0.8x 0.5x 0.8x 0.7x 1.1x

3.6x

2.4x

1.1x

6.8x

2.6x 2.7x

4.1x

1.6x

3.0x

1.9x

3.3x

1.7x

3.2x

4.7x

1.3x 1.0x 0.8x

1.8x 1.6x 1.3x 1.6x

0.6x

1.6x 0.9x

1.3x 1.3x 1.7x 1.7x

0.0x

2.0x

4.0x

6.0x

8.0x

AerospaceElectronics

Aerostructures CommercialAirframes

Components &Subsystems

Controls andSystems

DefenseElectronics,Sensors &

C4ISR

Engines &Engine Systems

Government, ITServices &Software

Interiors Machined &Cast Parts

MRO,Distribution,

Logistics

Prime DefenseContractors

Satellites,Satellite

Services &Space Systems

SpecialtySystems &Services

3.4x

6.0x 7.3x

3.4x

7.7x 8.6x

6.4x

4.1x

8.8x

6.1x

9.6x

6.5x 4.7x

9.6x

15.0x

10.9x 10.5x

15.4x 15.7x

12.8x

9.2x

12.4x

15.7x 16.0x

14.0x 16.0x 15.8x

12.3x

9.3x 8.0x 8.7x

10.1x 10.4x 10.4x

6.9x 8.4x

10.8x 9.0x

12.5x 10.7x

13.0x

10.8x

0.0x

5.0x

10.0x

15.0x

20.0x

AerospaceElectronics

Aerostructures CommercialAirframes

Components &Subsystems

Controls andSystems

DefenseElectronics,Sensors &

C4ISR

Engines &Engine Systems

Government, ITServices &Software

Interiors Machined &Cast Parts

MRO,Distribution,

Logistics

Prime DefenseContractors

Satellites,Satellite

Services &Space Systems

SpecialtySystems &Services

Source: CapIQ Database; Revenue multiples above 8x were filtered out of data.

The MRO sub-segment is valued in the top half of Aerospace & Defense segments

8

Market Conditions: Private Transaction Valuations

Source: CapIQ Database; Seabury M&A Transaction Database.

R² = 0.72

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

0% 5% 10% 15% 20% 25%

LTM TEV/REV

LTM EBITDA Margin

LTM TEV/Rev vs. EBITDA margin

On a private transaction basis, in recent history EBITDA Margin and Transaction Size are the most highly correlated factors to premium MRO transaction multiples (even more so than Revenue/EBITDA growth and backlog size/growth)

0.0x

5.0x

10.0x

15.0x

20.0x

$1 $10 $100 $1,000 $10,000

Total Enterprise Value @ Closing

TEV/EBITDA Multiples vs. TEV ($M)

LTM TEV/EBITDA

PREMIUM

DISCOUNT

9

Finding the Best Buyer (Sell-Side)

Financial Sponsors

(With Relevant MRO Holdings)

Distribution Companies

MROs (Independent and Captive)

Financial Sponsors (With prior

interest, A&D experience)

There are numerous “consolidator” sponsors in the A&D segment with relevant holdings nearing the 18-month “harvesting ” window Sponsors remain active; too few deals in the middle market range (~$25M+ EBITDA) As in 1H15, expect sponsors with strategic holdings to demonstrate strong ability to pay

(access to financing is coming into question)

There is a relatively small but active community of sponsors with relevant A&D and distribution experience Primary rationale is to expand customer base of non-A&D assets, into strategically

desired A&D customers Smaller assets, even with concentration, often complement a product solution gap -

while realizing overhead, direct operating cost synergies

Distribution was a highly active A&D segment for M&A in 2015 Public trading valuations declined, but rebounded or now stable Third party distributors are experiencing some volume softness M&A may be a necessity to fill the shortfall

Trend by OEMs and airlines/captive MROs to re-integrate work in a slower market Airline consolidation and capacity discipline appear to have caused some deceleration of

MRO volume, activity Similar to distribution, MRO has also experienced some softness

CATEGORY RATIONALE (ILLUSTRATIVE)

10

Finding the Best Target (Buy-Side) An efficient target-screening process focuses effort on a clear set of objectives and key criteria that can be evaluated before significant resources are expended on due diligence… however, in the final analysis, key contractual details heavily influence the final outcome

Filter 1: Is target “in-scope”

Outside relevant market?

Within sub-segments / focus areas?

Too small / insignificant player?

Filter 2: Relevant products/ services

Do products/services fit strategic and investment objectives?

Which “potentials” have access to high growth / desired markets?

Filter 3: Acquisition feasibility

Direct competitor / strategically misaligned?

Structural barriers

– Known “not for sale”

– Difficult carve-out

– Recent failed transaction

Filter 4: Other considerations

Other knowable factors that make Target attractive / unattractive?

− Political implications

− Labor hindrances

− Deteriorating markets/ disintermediation

− Shareholder complexity

“All Potentials” “High Potentials”

1 2 3 4

Filters

11

Positioning Common MRO Attributes

Buyer/Seller Position Common Attribute Trend Risk Mitigation / Position Levers

Revenue Stability - Purchase Order convention - Invoicing to a MOU

- Supply vs. capacity analysis - Structural OEM cost gap(s)

Backlog Health

- LTAs (in certain cases) - Visibility of fleet/platforms

- Customer relationship strength - Relative cost advantage/BTE

Margin Stability - LTAs (in certain cases) - Scale effects

- Standard component pricing discounts

Competition - Regional competition - OEM, 3Pty cost discipline

- Prohibitive ferrying costs - Local vs. broad competition

Disintermediation / Displacement

- OEM open capacity - Component (supplier)

- Structural protections (low-cost or exclusive provider status)

Operating Leases - Specific-use facilities - Lessee options, extensions

- Position in airport/regulated property - Proximity to key customers

Sustainable workforce (incl. Training)

- Strong regional competition - Changing requirements

- Tenure analyses - Customer longevity analyses

Authorizations & Certifications

- Expensive in many regards - Becoming more restricted

- Changing OEM dynamics reducing or limiting new entrants (BTE)

Systems & Supporting Infrastructure

- Standardized, cost effective platforms across the industry

- Strong business controls can be a differentiating factor

A critical factor - that can be monitored and influenced prior to a sale process - is maintaining visibility of (contractual or informal) strategic agreements underlying the forecast

12

Positioning Key Business Attributes: Competition Segmenting the industry on various levels isolates the real competition and positions the company to highlight its key value proposition relative to other players

13

Positioning: Management Depth The biggest question underlying the demand forecast is

Regarding maintenance businesses, the depth of the operators becomes a key factor to support business stability beyond the certifications and authorizations

CEO

5 15 13 11

SVP Mx Operations

SVP Flight Operations

SVP Business Develop’t

SVP General Counsel

Chief Financial Officer

VP Human Resources

Senior Director

n Indicates number of years of tenure

Senior Leadership/ Department Heads

Direct Report to Leadership Position

9 15 16

12 18 36

4 12 13 8 14 15

40

23 26 26 21

16 19 13 4

1 2 13 16 19 22 15 12

10 11 9 4

3 4 9 1

[NAME] [NAME] [NAME] [NAME] [NAME] [NAME] [NAME]

[NAME]

14

United States

Eurozone(1)

Brazil

United Kingdom

India

Japan

China Russia

Positioning: Macroeconomic Factors GDP recovery is faltering in many regions – the global slowdown and reversal of funds flows from emerging markets will play out significantly in 2016/2017

Real GDP trend analysis – YoY growth

-6

-4

-2

0

2

4

08 06 04 20 18 16 14 12 10

-6

-4

-2

0

2

4

18 16 14 12 10 08 06 04

-6

-4

-2

0

2

4

6

20 18 16 14 12 10 08 06 04

-10-8-6-4-20246

20 18 16 14 12 10 08 06 04

-6-4-202468

10

20 18 16 14 12 10 08 06 04

-15

-10

-5

0

5

10

18 16 14 12 10 08 06 04

2

4

6

8

10

12

18 16 14 12 10 08 06 04 4

6

8

10

12

14

16

18 16 14 12 08 06 04 10

Source: S&P Capital IQ & Bloomberg; % change YoY. 1. “Eurozone” – an economic and monetary union of 16 European Union member states which have adopted the Euro currency as their sole legal tender

15

Maximizing Value Through the M&A Process Extensive preparation creates an environment in which discipline can be achieved, in terms of information flow and speed – from market entry through documentation – to maximize both valuation and residual/contractual risk outcomes

STRATEGIC VALUATION

BASE FINANCIAL VALUATION

ADJUSTMENTS

SYNERGIES

COMPETITION $ Value

SCARCITY VALUE

Background Business Strategy Competitive Advantages Key Markets Growth Story Financial Analysis Business Valuation Prepare Data Room Develop Buyer List

MARKETING

Pre- Marketing

Create Marketing Materials

Buyer Solicitation

Buyer Due Diligence

Negotiation & Documentation

Buyer Selection

Intelligence Gathering Initiate Contact Sign NDAs Preliminary Discussions Distribute CIMs Solicit IOIs Management Presentations On-Site Visits Initial Due Diligence Deal Structure LOIs

Final Diligence Legal Negotiations Transition Planning Services Agreements Final Deal Structure Documentation Finalize Schedules Closing

PREPARATION CLOSING

16

M&A Processes Can Be Complex, Long-Term Campaigns

Source: New Yorker Magazine.

middle-market repair stations – m&a...

Documents