MIAMI—The maintenance, repair and overhaul (MRO) sector is ripe for consolidation, and aerospace investors and larger companies looking for strategic acquisitions are in hot pursuit of companies in the field, insiders say.
“I think you’re going to see a real uptick in interest in the aftermarket,” says Nick Fazioli, the senior vice president of investment banking in aerospace and defense at Jefferies LLC, which consults on mergers and acquisitions (M&A). “It’s an area in need of investment and consolidation.”
“I think this is the next big play [for aerospace M&A],” he says, and adds that many of the stars have aligned. First, the cost of borrowing in general is quite low. But more specifically to MRO, besides seeing too many players, investors are attracted by aerospace and aviation’s historical growth outpacing the economy in general. And they like the long-term relationships companies tend to have with customers, Fazioli says.
Jim Keenan, a senior adviser at the Seabury Group and CEO of Gray Wolf Advisory Services, also see opportunities for acquiring companies in improving MRO’s use of information technologies.
“There’s a big gap between today’s IT and what the average MRO has,” he says. “the systems we use are not much better than chisels and tablets.” Keenan says he is not talking about the basic hardware and software. Rather “integration is the challenge,” and “there are no industry standards.” A strategic partner or even a private-equity firm with the right experience could increase the value of an MRO business by working on that, he believes.
He also sees opportunities for MROs that can form partnerships to get out ahead on new technologies, such as additive manufacturing, adding, “The time is going to come when technology at MROs catches up with OEMs.”
The two spoke at a panel on “How to Forge Profitable Partnerships” at Aviation Week’s MRO Americas convention and exhibition on April 15. Owners of smaller companies considering a merger with a bigger player or acquisition by a private-equity firm need to decide specifically what they want.
So-called strategic players, companies seeking to grow and form synergies through acquisition, are typically willing to pay more and plan to keep the smaller concern indefinitely. But many MRO owners may find bristle at being subordinates in larger companies. Private investors, on the other hand, may allow the acquired company’s managers more latitude, but they plan to sell the company again at some point.
“Finding an investment partner with the right style is key,” said Gregory Sissel, managing director of Platte River Equity, a Denver firm managing $700 million in assets with deep experience in aerospace machining. He and others say private-equity firms vary greatly in style, skills and interests. But they agree the field has gotten a bad rap as being only interested in cutting costs and turning a quick profit—the corporate version of “flipping” a house in real estate investment.
“Buyers are smart,” Sissel says of eventual buyers of Platte River’s holdings. “They understand if you did not invest in the business.” He said his firm would not forgo a capital investment even 6-9 months before a planned sale.
In fact, Keenan says, that’s one of the things private equity has to offer the MRO industry: “What’s generally lacking (in MRO) is a sustainable, trustable mechanism for investment.”
Valuing an MRO-related business can be tricky, the consultants and investors say. Fazioli says MRO is a tough sector to analyze on the basis of information about public companies, because “everything is part of something else.”
But having seen some heated auctions for aerospace companies lately, Fazioli says, “I’d say for management looking for investment or partners, it’s a very good time.”