Ryan Murphy KAL Capital Markets

Fast 5: Will The M&A Market For MRO Be As Hot In 2019?

The merger and acquisition appetite in 2018 for aviation aftermarket companies was competitive. KAL Capital Markets advised STS Aviation Group on its equity partnership with the Greenbriar Equity Group that closed in January. Ryan Murphy, a partner at KAL Capital Markets, which specializes in aerospace and defense investment banking services, provides his outlook for MRO M&A activity in 2019.

What are the most desirable segments of the MRO business for investors and how do those valuations compare to others?

Based on our experience, the highest valuation within the MRO ecosystem is component MRO, especially ones with either size and scale, or unique capabilities. We’ve seen the large consolidators in the space being driven by private equity quite a bit—StandardAero and Wencor are the two largest acquirers in that space. They have bought a bunch of smaller, $10 million-$100 million businesses, often family owned, and really tried to offer their customer base a one-stop shop, including a variety of ATA chapter repair capabilities.

What kind of multiples are you seeing for companies, such as STS Aviation Group and Ascent Aviation Services, both of which you helped sell?

Multiples are all over the place. Heavy MRO businesses can be in the single-digit EBITA (earnings before interest, taxes and amortization) while larger, very well diversified aviation services businesses tend to trade for double-digit EBITA multiples. 

How many companies formally looked at investing in STS? How did the process go and how long did it take?

Most of that is confidential, but I can say our processes tended to be a little bit narrower. The STS Aviation owners were looking to partner with an equity group that had more than just capital to offer—they also wanted to leverage aviation relationships and industry expertise.

What’s your forecast for the number of M&A deals in the aviation market in 2019: will it match 2018? How big is the pool of candidate companies to be sold?

We anticipate approximately an equivalent year. There were some larger transactions that moved the needle quite a bit, but generally speaking, we see a lot of the equity groups looking at the OEM cycle and seeing that a lot of the growth is in the rearview mirror. They actually see a lot more potential in the aftermarket.

Are you concerned about potential interest rate increases and how that could affect acquisition appetites?

No, not at the moment. We feel a bigger factor is the amount of dry powder that the private equity community has raised and needs to deploy. We feel that any uptake in interest rates will be mitigated by the fact that quite a bit of money needs to be spent on acquiring privately held businesses. With that said, if interest rates were to double, my answer would be quite a bit different.

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