Aerospace Deal Market Heats Up

The pace of aerospace-related investments is accelerating as buyout shops vie to strengthen their position in the sector at what could be the bottom of the market.

On Jan. 13, Lincolnshire Management Inc. announced that it had bought two companies involved in aviation training, Delta Connection Academy Inc. and Aerosim Technologies. The same day, Leonard Green & Partners announced the $250 million all-equity acquisition of AerSale, a Coral Gables, Fla.-based company that buys old aircraft. And on Feb. 1, Odyssey Investment Partners, a longtime investor in the industry, bought Wencor Group LLC, a Springville, Utah-based maker and distributor of aircraft parts.

So far this year there have already been four sponsor-backed deals in the sector, which is nearly as many deals struck in all of 2009, according to Thomson Reuters data (see chart for details). Aerospace and defense transactions involving buyout shops took a dive in 2009, with only six deals, down from 12 deals in 2008, 18 in 2007, 10 in 2006, and 16 in 2005.

Demand for air travel may have reached its nadir, offering a good chance to invest at the bottom of the cycle, said Robert Wagner, a managing director at investment bank Imperial Capital LLC. Wagner, who has specialized in aerospace and defense banking since the 1990s and who advised AerSale and Odyssey Investment in their respective deals, said that U.S. airlines have parked about 2,000 planes in response to declining demand. Many of those planes will need maintenance work when they are re-activated, to the benefit of companies that provide aftermarket parts.

“Improving air travel trends will have implications throughout the industry—demand for [aircraft], spare parts and service being three big areas,” said Wagner. “If you’re putting money in aviation today, you believe that the recovery is beginning and you’ve probably dismissed the notion of a double dip recession.” Wagner himself is in the optimistic camp, anticipating that air travel demand will start increasing over the next six to 12 months.

Lincolnshire is combining Delta Connection and Aerosim under one holding company, Flight Training Acquisitions LLC, which will provide a suite of training programs and facilities to educate pilots for work throughout the world. Delta Airlines Inc. is a shareholder and Global Technology Investment Group, a New York-based investment firm, is a co-investor in the company, which is expected to generate $40 million in sales in 2010. The deal is the first investment from Lincolnshire’s $835 million fourth fund. Jonathan Schulhof, a partner at Global Technology Investment, said the firms will look to expand the company internationally. “Based on experience with our current aviation interests in the Asian market, we saw a clear opportunity for a strong product offering,” he said in a statement announcing the deal.

AerSale, Leonard Green’s first investment in the aerospace industry, intends to buy more than $1 billion worth of used aircraft in the next five years, then lease them to second-tier airlines or break them down to sell as spare parts. “It’s a very contrarian move right now because the airline industry is in very bad shape with both passenger and cargo carriers having more aircraft than needed, creating a surplus, so there’s an imbalance of sellers and no buyers,” Managing Partner Peter Nolan told Buyouts during an interview in January.

Odyssey Investment’s past deals in the industry include the acquisition of Aviation Technologies Inc., a supplier of parts and components that it sold in 2007 for $430 million to TransDigm Inc. TransDigm, another parts supplier, was actually a former portfolio company of Odyssey Investments, which sold it to Warburg Pincus LLC in July 2003 for $1.2 billion. In 1998 Odyssey Investment orchestrated an initial public offering for TriStar Aerospace, a distributor of fasteners used in the industry. And in 2007, Odyssey Investment sold Tri-Star Electronics International Inc., a component manufacturer, to Brockway Moran & Partners for an undisclosed amount. Under Odyssey Investment’s ownership, these companies completed a total of nine add-on acquisitions.