EBITDA stands for “earnings before interest, taxes, depreciation and amortization.” In the acquisition world, businesses are valued by a multiple of their EBITDA. The buzz lately is that FBOs are popular among some aggressive private equity funds, and that has led to sales on the order of eight or nine times EBITDA–a rising trend that many say cannot continue.
Large, established private equity firms such as the Carlyle Group have been interested in business aviation for the past several years, backing their opinion that the airline woes resulting from 9/11 would be a boon for private air travel. Over the past few years, smaller private equity firms have risen in stature, some say because ever more wealthy individual investors are seeking to further diversify their portfolios with another alternative to public markets.
NATA directly addressed questions of the relationships between such financial investment houses and the FBO industry. Questions included what the firms look for in acquiring FBOs and where this will lead down the road. Panelists were Greg Elliott, partner, CapStreet Group; Peter Clare, managing director, Carlyle Group, aerospace division; Jim Haynes of the consulting firm Aviation Group (involved in the purchase of Atlantic Aviation by Macquarie Bank); and Bruce Pollack, managing partner, Centre Partners. NATA president Jim Coyne moderated the discussion.
For background on private equity investing, AIN asked Mike Bonnet, managing partner at H.B. Equity Partners, for some fundamentals and an opinion about whether the FBO industry is, indeed, a good candidate for this form of financing.
Bonnet said the funds typically pool capital from three sources: institutions such as company pension funds, which he said typically will invest from 3 to 5 percent of their portfolio in private equity; private or state sources; and wealthy individual investors.
He said a typical acquisition would be funded by about a 40-percent contribution from the fund, supplemented by 60 percent borrowed from a bank or other financial institution. He explained the first purchase is usually a large one, such as a chain of FBOs. “That would be followed by a buy-and-build phase, in which individual mom ’n’ pop shops are acquired to build the network.”
The object is to reduce overhead in the form of central billing, human resources and other back-office functions, while building negotiating clout and network synergies. Elliott of CapStreet, which is involved with the growing Trajen FBO chain, said the private equity firm can typically help with acquisition strategies and other financial issues. “We look for fragmented industries,” said Elliott, and with the largest existing chain of FBOs (Signature) owning less than 10 percent of the existing facilities, NATA’s primary constituency certainly qualifies as “fragmented,” according to Signature president Beth Haskins.
Clare from Carlyle Group said his fund now owns 10 aerospace companies totaling $8.6 billion in sales. He said six of the companies address business aviation, most importantly Piedmont Hawthorne, recently merged with Garrett Aviation, and Associated Air Center. With 35 FBOs in its North American network, Piedmont Hawthorne is in the acquisition mode.
Clare said, “We like business aviation for its growth. Flight hours are up and new aircraft orders are strong. The fragmented nature of the industry indicates to us that the network effect is a plus. There are also synergies with our maintenance holdings and other services.”
Haynes of Aviation Group said Macquarie Bank’s strategy differed from that of private equity funds in that it was prepared to accept a lower rate of return for a longer-term investment. He said the public nature of the bank allows stock buyers to see the FBO business for the first time. “They like it,” he said. Haynes defined three stages in an FBO’s financial structure–the entrepreneurial start-up phase; the private-equity phase (where value is raised, with an exit strategy in mind); and the long-term phase with a parent willing to accept single-digit returns over many years.
Owners Have Attractive Options
Pollack of Centre Partners was most recently involved in the acquisition of its first FBO on Jefferson County Airport outside Denver. He sits on the board of Ross Aviation (which spearheaded the purchase) and said he has letters of intent from three more FBOs. Pollack, whose firm manages $1.5 billion in assets, said effective management is critical to the success of a large network. “Owners make better managers,” he said. “The object is to turn employees into owners.” Centre Partners maintains flexible exit strategies for the owners of businesses it acquires, said Pollack, offering options from total liquidity to staying on the management team.
Given that the panelists said there are about 500 FBOs that are viable targets for acquisition, AIN asked if the private equity firms represented on the panel had a target number of facilities they would like to see in their networks. Clare said Carlyle is looking for 60 to 70 facilities–about double the number of FBOs currently in its stable. Pollack declined to assess a number for Centre Partners. Haynes said Macquarie has no target figure, while Elliott from CapStreet said, “We’re aiming for six per year, and we’ll see where we are in two years.” Coyne quipped in response, “Sounds like twelve.”
At the close of the program, Charlie Priester, second-generation leader of Priester Aviation (since sold to Signature) at Palwaukee Airport outside Chicago, sounded a note of caution in the face of this symphony of financial interest in FBOs.
Speaking from the audience, Priester (now chairman of Priester Aviation LLC, a charter provider) noted that an FBO business is typically nurtured by an entrepreneur who puts time, energy and heart into its growth and success. He or she is there 24/7 to fight the political battles, host the community open houses and do whatever else it takes to make the business succeed and grow. He questioned whether that level of commitment would spring from the hearts and minds of salaried general managers.
H.B. Equity Partners’ Bonnet, when advised of some of the myriad pitfalls facing the FBO business, also voiced concern about such “intangibles.” He said that sometimes the thrill of the hunt when pressing forward with acquisitions can override some fundamental realities that can scuttle the integrity of the system. In other words, even the best laid financial plans have been known to go badly astray.