Daily Memo: Aftermarket M&A Is Heating Up
IInvestor interest in aviation aftermarket assets has remained steady through a broader slowdown in mergers and acquisitions (M&A) and is heating up now even as high interest rates continue to weigh on the deal-making environment.
IInvestor interest in aviation aftermarket assets has remained steady through a broader slowdown in mergers and acquisitions (M&A) and is heating up now even as high interest rates continue to weigh on the deal-making environment.
Middle-market investment bank Meridian Capital highlighted “strong investor interest through the first half of the year in the MRO/aftermarket” in a July 10 research note. Meridian estimates that overall M&A deals grew 8% year-over-year from January to June.
On July 19, newly public Loar Holdings said that it would buy Applied Avionics—known for its Vivisun and Nexsys brands—for $385 million in cash. Following the announcement, Aviation Week noted that the deal illustrated what financial analysts see as a clear example of Loar’s niche aftermarket M&A strategy. “We also believe that investors have largely been waiting for Loar to make an acquisition, especially one of this size,” Ken Herbert of RBC Capital Markets said in a client note. Applied Avionics is expected to generate adjusted pretax earnings this year of $21 million and sales of $40 million.
Loar appears to be taking a page from the playbook of other proprietary-part, aftermarket-oriented aerospace firms such as TransDigm Group and HEICO, known for their strong M&A appetite. In May, TransDigm announced two new acquisitions: a $655 million all-cash deal for Raptor Scientific from L Squared Capital Partners and the purchase of SEI Industries for an undisclosed amount. At TransDigm’s investor day in June, the company’s management said that it would continue to focus on small to midsize acquisition targets.
Among aftermarket-oriented A&D firms, HEICO may have the largest shopping list. During the company’s upbeat fiscal third-quarter earnings call, co-CEO Eric Mendelson said of future M&A deals that the “pipeline today remains incredibly robust” with many projects in the works.
Chairman and CEO Larry Mendelson elaborated. It seems the manufacturer of jet engine and aircraft component replacement parts is spoiled for choice, as Mendelson said HEICO is “looking at actually too many acquisitions right now.”
The bullish M&A sentiment of HEICO’s leadership comes as the company reaps the benefits of its $2 billion acquisition of MRO specialist Wencor and continues to snap up promising assets. On Aug. 22, HEICO announced that its Flight Support Group had acquired the Aerial Delivery and Descent Devices divisions of South Windsor, Connecticut-based Capewell Aerial Systems for an undisclosed amount. Capewell’s customer base includes large OEMs, end-users and distributors.
One distinctive characteristic of HEICO’s M&A strategy is a preference for non-private equity assets “where pricing tends to be more reasonable and HEICO’s reputation as a sound buyer is a plus,” Robert Stallard of Vertical Research Partners said in an Aug. 27 client note.
Yet there is plenty of private equity (PE) appetite for aftermarket assets, as well. There have been 13 PE-backed investments in the aviation MRO segment this year through Aug. 15, accounting for about half of all such M&A deals, according to financial data provider PitchBook.
Looking ahead, PitchBook predicts that “an influx of PE capital” will flow into the aftermarket, which aligns with the bullish view of the sector among other analysts.
Stallard acknowledged in a Sept. 3 client note that there have been some investor concerns recently about the financial outlook for the aerospace and defense sector, but emphasized Vertical Research Partners’ forecast remains positive. As OEM supply chain travails limit the retirement of older planes, the aftermarket is still on track for above-average mid-teens growth this year. Though that is expected to ease to low double digits in 2025, the growth rate will still be “comfortably ahead” of revenue passenger kilometers and global GDP growth, he said.