Florida is home to the largest number of independent maintenance, repair and overhaul (MRO) companies in the United States. While mega-deals such as Dubai Aerospace Enterprises’ acquisitions of SR Technics, Standard Aero and Landmark Aviation garner press attention, smaller MRO companies are being acquired at record levels with scarce media attention. In this issue we take a closer look at this interesting segment.
A Review of Middle Market MRO Transaction Activity
2002 – 2005
Historically, mergers & acquisitions activity in the middle market MRO sector was relatively dormant until 9/11, SARS and the outbreak of war in Iraq all combined to exacerbate and prolong a downturn in the commercial aerospace industry that had actually commenced prior to 9/11. As a result, between 2002 and 2005 numerous MRO firms facing financial distress were bought at low prices by sharp-penciled private equity firms. With ready access to capital and low interest rates, these financial buyers recognized the longer-term opportunity facing them.
2006 – Today
The MRO sector has regained its footing as the commercial aerospace industry receives record numbers of new aircraft orders and the airline industry fragilely recovers from difficult times. The $41 billion MRO sector is forecast to reach $63 billion by 2017 as overall fleet size increases and airlines continue to transfer more work to MRO firms. This positive outlook has driven a second, much larger cycle of M&A activity; however, this current wave of consolidation is driven by buyers seeking attractive growth opportunities rather than sellers desperately seeking to rationalize excess industry capacity.
Middle Market MRO Acquisitions per Year
Middle market defined as deals <$100M annual revenues; .2008 notional assumes activity continues at same Jan – Mar 2008 pace; Source: PCE analysis.
A Review of Middle Market MRO Transaction Prices
Levels of MRO deal pricing closely matches the increased level of demand. In 2006 and 2007, owners of middle market MRO companies received a record median 1.4x and 1.2x sales when selling their companies. (Note: the high level of pricing in 2001 was driven by a small number of outliers – pure-play military acquisitions post-9/11 as certain defense companies correctly anticipated market demand).
Middle Market MRO Median Acquisition Price/Sales Multiples
How Long Will This Cycle Continue?: Drivers of Deal Activity & Pricing over the Next 12-18 Months
Important economic fundamentals in the broader aerospace sector will be at work in sustaining M&A activity and prices in the MRO segment:
- Strategic buyers are holding high levels of cash as a result of recent years’ high levels of government defense spending and record levels of new aircraft orders.
- Despite recent turmoil, stock prices of strategic buyers are at relatively record highs – even though analysts unanimously anticipate tighter times ahead. On the defense side reasons are as varied as pressure to reduce government deficits, the eventual draw-down of U.S. military involvement in Iraq, and leadership changes in the White House in 2009. On the commercial side, reasons include continued structural problems in the airline industry, persistently high oil prices, and the impact of a recession. Therefore:
- The combination of hordes of cash and the performance expectations embedded in strategic buyers’ stock prices will drive an exercise in capital redeployment over the next eighteen months. In other words, strategic acquirers are and will be “buying growth”, thus sustaining current pricing levels.
YE Cash on A&D Company Balance Sheets ($B)
Source: Capital IQ
S&P A&D Index
Source: Capital IQ
More specific to the MRO sector, strategic and financial buyers will continue to pay above-market prices for companies that provide access to key customer segments and locations, or that fill gaps in critical or important capabilities, including
- Ability to contribute to “total care“ and “cost per hour” programs
- Ability to contribute to faster turnaround and delivery times
- Access to start-up carriers approaching their first heavy maintenance checks
- Access to corporate jet customers approaching their first heavy maintenance checks
- Maintenance training providers
- Landing gear overhaul capabilities
- Health & usage monitoring, diagnostics & prognostic capabilities
- Superior engine repair capabilities compared to OEMs
- Asset management, inventory management capabilities and supply chain solutions
- Corporate jet avionics & systems MRO capabilities (despite its lower margins)
- Cabin interiors & in-flight entertainment equipment (while the going is still good)
- Parts Manufacturing Authority (PMA) capabilities