Mercury Air deal hits a speed bump

 - March 16, 2007, 2:42 PM

A source close to Mercury Air Group’s top-level management team has told AIN that the sale of the company’s FBO division, Mercury Air Centers, has been delayed. Originally expected to close at the end of January, the deal with Washington, D.C.-based business development firm Allied Capital remains in the due-diligence phase and is now expected to close about the middle of next month. Mercury Air Centers operates a chain of 19 FBOs nationwide, concentrated in the Southeast and on the West Coast.

In a complicated financial arrange- ment announced last November, Allied Capital signed a definitive purchase agreement to acquire the division, one of four business segments of Los Angeles-based Mercury Air Group. The $70 million transaction would also involve Allied Capital purchasing $24 million in debt from parent company Mercury Air Group, which would be repaid to Allied Capital from proceeds of the deal.

Allied Capital chairman and CEO Bill Walton said at the time he announced the agreement, “The fixed-base operations industry has very attractive economics for established companies.”

Mercury Air Group, a publicly held company that had reported a long string of losing quarters, reportedly faced stiff financial penalties if the $24 million in outstanding debt was not covered by year-end. In contrast to its other divisions, the FBO segment, led by COO John Enticknap, hasn’t posted a losing quarter in several years.

Mercury Air Centers was rumored to be for sale in the months preceding the Allied Capital announcement, with several suitors on the list of potential buyers.

At the time of the announcement last November, Signature Flight Support confirmed to AIN that it had expressed interest in some–but not all–of the Mercury Air Centers facilities, and had conducted advanced negotiations with Mercury’s management with an eye toward a deal.

Like Signature, Mercury Air Centers has several FBOs on airports that also serve scheduled airlines, such as Atlanta Hartsfield International (ATL); Los Angeles International (LAX); Ontario International (ONT), Calif.; and Burbank Municipal (BUR); Calif. Mercury Air Group’s other three divisions include MercFuel, a worldwide airline refueling concern that supplies more than 200 airlines and corporate fleet operators. There is some attractive economy of scale associated with having both divisions operating at the same airports.

Mercury Air Group’s other two divisions are Mercury Air Cargo, the original core business founded after World War II by veterans of the American Volunteer Group. The other division is the Maytag Aircraft government support services company, a contractor supplying the U.S. government with operations and maintenance services such as aircraft refueling; maintenance; ground handling; terminal services; and weather observation and forecasting.

Mercury Air Group Reports Net Loss

In its latest financial report, released February 17, Mercury Air Group reported a net loss for the three-month period ending Dec. 31, 2003, of $1.517 million or $0.47 per basic and diluted share. The results for the second quarter of fiscal year 2004 compare to the company’s net loss for the three-month period ending Dec. 31, 2002, of $596,000, or $0.18 per basic and diluted share.

The Air Centers division revenue for the first six months of fiscal year 2004 was $45.983 million, which produced a gross margin of $6.288 million. This compares to revenue for the first six months of fiscal year 2003 of $47.708 million, which resulted in a gross margin of $5.914 million. Aviation fuel sales volume in fiscal year 2004 was 15.740 million gallons, a decrease of 1.397 million gallons from last year’s sales volume of 17.137 million gallons.

Said Joseph Czyzyk, president and CEO, “The pending sale of our FBO business, which we expect to close at the end of March or early April, will result in a significant reduction of debt and debt-service costs, which will position Mercury for improved profitability.”