By Luc Roberts (University of Warwick), and Kevin Insixiengmay, Martin Palomar, Andre Assouline (HEC).
Photo: Chris Leipelt (Unsplash)
Introduction
Based in the United Kingdom, the aviation services company Signature Aviation will be overtaken by three American funds: Bill Gates’ Cascade Investment (whose already established stake will jump from 19 to 30%), Blackstone and Global Infrastructure Partners.
Signature Aviation is a British company whose revenue comes mainly from its activity in the US wherein it dominates the market for private jet services (fuel and non-fuel). In October the fuel sales which account for three quarters of the group’s revenue were down 20% from last year. However, the company prides itself in the way they weathered the pandemic, and as pecuniary customers opt for private flights instead of commercial airlines more and more, the outlook seemed all the more interesting for investors.
This led to Cascade and Blackstone’s mutual proposition of a £3.1B purchase price back in January with a £3.80 price per share. Global Investment Partners then joined the bid in the 7 of February by lifting the proposed share price to £4.11 i.e. £3.5B as a price tag for the company,
The buyers are confident their leveraged financing, which is likely to beat Signature’s current 5% interest, will allow the company to achieve returns of 10%. The unique value proposition of Signature combined with the funds’ convenient access to financing entices the acquirers to offer an equity price tag 65% above its 3 month undisturbed share: adding up to a total enterprise value of £5.1B.
Overview of Signature Aviation (Target)
Our target in this report is Signature Aviation, a British publicly listed company, operating in the aviation services industry. Founded in 1879, the company covered the automobile and aviation sectors first, before specializing into the aviation segment in the late 1980s. It is today listed on the London Stock Exchange and headquartered in London. Managed by Mark Johnstone (its CEO) and Sir Nigel Rudd (its chairman), the company totals today more than 8,200 employees, generating a total revenue of US$ 1,414 Million in 2020. It has sold its Ontic division to rebrand its name in 2019, to CVC Capital Partners, in a deal totaling US$ 1,365 Million.
Overview of Bill Gates’ Cascade
Cascade Investment is an American Investment company, founded by Bill Gates in 1995 and led by its Chief Investment Officer Michael Larson, that also manages the Bill & Melinda Gates foundation. It has 103 employees and it has participation in many companies such as the Four Seasons Hotels Group, the Canadian national railway, Beyond Meat, Berkshire Hathaway, Diageo and finally Microsoft. It’s investment stake in Signature aviation capital is estimated today around 19%, a stake that could potentially increase up to 30% after the deal.
Overview of Blackstone
The Blackstone Group Inc. is an American alternative investment management company based in New York City. Founded in 1985, Blackstone was originally formed as a mergers and acquisitions advisory boutique but soon turned into a major asset management business specialized in fixed income investments, and private equity. Blackstone's private equity business has been one of the largest investors in leveraged buyouts and real estate in the last decade. As of 2019, the company's total assets under management were approximately US$545 billion. Managed by Stephen A. Schwarzman (CEO and chairman), the company totals today more than 2,905 employees (2019), generating a total revenue of US$ 7.338 billion in 2019. In 2019, Blackstone converted from being a publicly traded partnership into being a corporation
Overview of Global Infrastructure Partners
Global Infrastructure Partners (GIP) is an investment fund specialized in infrastructure assets in sectors such as energy, transport and water/waste. Founded in May 2006. GIP’s first fund raised US$ 5.64 billion, and its first investment was a joint venture with American International Group (AIG) to acquire London City Airport. In the meantime, GIP has made two additional notable airport investments (Gatwick Airport in 2009 and Edinburgh Airport in 2012) and a cross section of investments in other areas of the transport sector as well as the natural resource and power generation areas of the energy sector. GIP's third fund (GIP III) completed its fund raising in January 2017 with approximately $15.8 billion in investor capital commitments. As of August 2020, GIP had approximately US$70 billion of aggregate assets under management, most of which are concentrated in OECD countries. Managed by Adebayo Ogunlesi (Managing Partner and Chairman), the company totals today more than 150 employees.
Synergies
The deal has promising potential to reinforce Signature Aviation’s position as the market leader in the US fixed-based operator (FBO) market for private jets, where it offers aeronautical services such as fuelling, hangarage, and maintenance. Blackstone, Cascade are experienced investors in the aviation infrastructure space, and GIP owns Edinburgh Airport and a stake in Gatwick Airport. The consortium’s experience in the sector will facilitate the integration of greater operating efficiencies across Signature Aviation’s business and network. Signature may benefit from private ownership due to extensive access to capital and a long term investment approach, in order to continue delivering on strategic objectives and respond to industry changes. Future bolt-on acquisitions seem unlikely due to the small number of suitable targets, therefore the consortium will likely aim to achieve growth organically.
For private capital, Signature’s market-leading position in a sector with a high barrier to entry makes it an attractive proposition. Airport lease contracts are very limited, evidenced by the number of US FBOs remaining broadly stable over the last two decades. Signature also benefits from favourable industry dynamics as duopolies often form at airports - 80% of US airports are serviced by two or fewer FBOs. This means reduced price competition for fuelling, which is one of the highest costs for FBOs, making Signature’s network extremely powerful, creating a resilient business model. The resilience of the business has demonstrated during the pandemic, where it has maintained a strong financial positioning. This has attracted the attention of private equity funds as consistent cash flows allows them to raise debt levels to boost returns, resulting in eleven total proposals and a substantial 65% premium on the three-month pre-announcement share price. By increasing Signature’s leverage, Blackstone, GIP, and Cascade aim to generate annual returns close to 10% on the deal.
Risks and Uncertainties
Although Signature Aviation benefits from a market-leading position and favourable industry dynamics, long-term risks are present. As the efficiency of aircraft engines continues to rise, fuel sales will likely suffer, a major revenue stream for the business. This is compounded by jets being less likely to refuel at destinations before returning to their home-base due to greater flight range, decreasing fuel sales at smaller airports. Another risk is maintaining crucial airport lease contracts, which are limited. As the decreased price competition for its services has massively benefitted Signature, interference from regulatory bodies and pro-competition legislation is a considerable threat to profitability.
Signature’s business is strongly linked to the private jet market, therefore a decrease in corporate and private aviation is a source of risk to the business, although this is unlikely to occur. The outlook of the jet market is generally regarded as positive, with the FAA projecting a 2.8% CARG in private jet flight hours over the next decades. The pandemic has also introduced many first-time jet flyers to private aviation, creating a larger customer base and boosting jet sales.
The transaction is subject to Signature Aviation shareholder approval alongside the receipt of antitrust clearances. The uncertainty surrounding shareholder approval has been reduced by shareholders NNS Investment and Cascade pledging to vote in favour of the deal.
“The resilient performance and strong financial position through the pandemic has enabled the Signature board to consider its future and evaluate this offer from a position of strength” - Signature Aviation Chairman Sir Nigel Rudd