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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
Mar-14 Sep-14 Mar-15 Sep-15 Mar-16
Airframe OEMs & Primes
Commercial Airframes
Prime Defense Contractors
6x
7x
8x
9x
10x
11x
12x
13x
Mar-14 Sep-14 Mar-15 Sep-15 Mar-16
Complex Systems
Components & Subsystems ex-TDG
Controls & Systems ex-Integrators
Engines & Engine Systems ex-GE
8x
13x
18x
23x
28x
33x
Mar-14 Sep-14 Mar-15 Sep-15 Mar-16
Interiors & Integrators
B/E Aerospace General Electric
TransDigm Zodiac Aerospace
8x
10x
12x
14x
16x
18x
20x
Mar-14 Sep-14 Mar-15 Sep-15 Mar-16
Specialty Defense
Defense Electr., Sensors & C4ISR
Satellites & Space Systems
Specialty Systems & Services
9x
10x
11x
12x
13x
14x
15x
Mar-14 Sep-14 Mar-15 Sep-15 Mar-16
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
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