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Since independent ground handlers became an integral part of commercial aircraft ramp operations, several “truths” have become self-evident. Every so often new handling companies pop up, usually at one airport. If they thrive, they grow and move on to multiple airports, and sometimes become multi-national.
Then, sooner, and sometimes later they are acquired by new owners, usually larger often multinational companies seeking synergistic expansion. Then sooner and sometimes later, these large ground handlers are acquired by even larger companies. Even the largest companies change ownership even more so with the advent of private equity, infrastructure, and sovereign wealth funds.
This phenomenon will continue even as the three largest ground handlers, Swissport, Worldwide Flight Services and Menzies experienced both changes in ownership and significant growth in recent years. This past year saw a major expansion of Alliance Ground International through its acquisitions of Total Airport Services and Airport Terminal Services.
The ownership of PrimeFlight changed from the Carlyle Group to Sterling Group, and shortly after the change in ownership Primeflight thought its European subsidiary Skytanking acquired one company in England and one in Scotland. Consolidation is simply a fact of life in our industry, so it is important for industry leaders to understand key issues confronted by both sellers and buyers.
In addition to providing and analysing industry changes, my partners and I at Edinburgh Midwest Aviation Partners hope to help the industry understand how consolidation through acquisition actually works. As this is a complicated and highly specialised area, we hope to do so over several articles from time to time.
While each transaction is different, country dependent, and influenced by tax and regulatory regimes, as well as labour issues, there are some commonalities.
For example, there are generally two ways to structure the acquisition of a business. This is important since recently there has been a greater use of asset purchases rather than stock or equity purchases. Asset sales generally leave liabilities with the seller, so in a perfect world they are preferable for buyers and can be a great route for sellers seeking a quick exit with minimal obligations to the buyers.
However, they have many minuses, especially if the buyer is not authorised or permitted to provide services at an airport (and would have to seek a permit). Moreover, it will be necessary to obtain assignments of customer contracts (this may also be necessary in a sale of equity if a customer contract or lease has a change in control provision).
Even if the intent is to hire existing staff, each employee must be interviewed and processed. For a seller, selling assets may mean paying higher taxes as both corporate taxes and dividend taxes may be payable, as opposed to a lower capital gain tax in many tax jurisdictions. So, like everything in life there are tradeoffs.
As commonly understood, while there are several ways to determine enterprise value (such as discounted cash flows), in the ground handling industry parties still rely on a multiple of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) as a key metric in evaluating deal values. However, it is not as simple as negotiating a multiple, as before EBITDA is determined it is necessary to “normalize” EBITDA by removing expenses which although deductible may be a form of ownership compensation or generally will not become an obligation of a new owner. In the past parties often used to average the prior three years but since the pandemic, parties are placing a much higher emphasis on the most recent normalized EBITDA, trading forecasts and even “run rates.”
When buying a company in a country that utilises a different currency than the buyer’s base currency, currency fluctuations must be accounted for. It is likely that business customs and practices may differ significantly, what is usual in the seller’s country may be unusual in the buyer’s country. Bookkeeping and accounting practices may vary even if both parties try to conform with International GAAP standards, and many companies for sale do not have audited financial records. Labor practices, severance requirements, employment benefits and government reporting differ. Not to be discounted, are regulations governing employee discrimination, harassment, and noncompetition and confidentiality covenants.
Another issue is what occurs post-closing. In the past many transactions involved some form of earn-out in our industry as a seemingly attractive way to maximize value. While they are still utilised, when necessary, they have become disfavoured as an earn-out will often create conflicts of interests between a seller who may feel compelled to remain involved in the business to protect the earn-out, and a buyer.
Finally, it has to be considered how to protect the exchange of confidential information if a transaction for whatever reason does not close. Of course, all parties sign Nondisclosure Agreements (NDAs) that govern during an exclusivity period and at least several years afterwards. Best practice for companies of all sizes and scales is to utilise an external “virtual data rooms” platform which provides both parties with audit trails, allow documents to be virtually shredded remotely, etc. inThe key is to prevent the unauthorised use of confidential business information by a party which “looked under the hood” so to speak, when competing for business. These issues require careful collaboration between sellers and their consultants including accountants, business brokers and counsel.
For more information about international aviation consultancy, Edinburgh Midwest Aviation Partners, visit www.edinburghmidwest.com