Aftermarket M&A Environment Shows Promise

CHICAGO—The outlook for mergers and acquisitions (M&A) in the aerospace and defense (A&D) aftermarket is improving following a relatively muted 2023, panelists said April 9 at the first day of Aviation Week Network’s MRO Americas conference in Chicago.

Jonathan Berger, managing director of Alton Aviation Consultancy, described 2023 as “the year of broken deals.” Alton’s data shows that M&A activity in A&D fell by several metrics last year compared to 2022 and has yet to recover to pre-pandemic levels.

Benjamin Hatcher, principal at J.F. Lehman & Company, noted that investors were largely “in preservation mode” during the worst years of the pandemic from 2020-21. Yet just as the pandemic began to ebb, “we were hit with a combination of inflation and supply chain challenges. From a sponsor standpoint, it was a bit more challenging to get deals across the finish line.”

High interest rates—which have remained at 5.25% to 5.5% since July 2023—have weighed on dealmaking. In his annual letter to shareholders published April 8, JPMorgan Chase CEO Jamie Dimon said the biggest American bank by assets could envision scenarios in which interest rates surged as high as 8% given factors such as high government deficit spending, continued military expenditure and global supply chain restructuring.

While markets expected six or seven rate cuts by the U.S. Federal Reserve earlier this year, they now expect no more than three.

High interest rates can also impact financial valuations. “In a business that is particularly capital intensive, that is an area where we have seen multiples lower than they were pre-COVID due to the current interest rate environment,” said Katya Brozyna, managing director at Jefferies.

Despite interest rates raising the cost of capital, there are several reasons for optimism about dealmaking in the MRO segment. For instance, the aftermarket has been performing strongly overall. In a January report, Jefferies forecast aftermarket revenue would reach 120% of 2019 levels this year and 127% in 2025 given strong travel demand, slowing retirements and supply constraints.

In a sign of continued investor interest in the aftermarket, the financial firm Crosslake announced on March 11 that it had completed the acquisition of the South Florida-based MRO companies Continental Aircraft Support and Magnum Aircraft Repair Services (MARS) for an undisclosed sum. Crosslake plans to close another deal in June—for a parts company.

Meanwhile, attendees surveyed at the April 9 M&A panel discussion at MRO Americas were bullish about the M&A environment this year. While 20% said that they expected transaction volume to fall, 70% believed it would increase.

Looking ahead, aftermarket dealmaking could pick up with infrastructure investors coming into play as consolidators of the fixed-base operator (FBO) space, Brozyna said. FBOs are firms that have been granted the right to operate at an airport. They offer services such as aircraft maintenance, fueling, hangaring and flight instruction.

“Infrastructure private equity has billions and billions of dollars to deploy and there are only so many toll roads and airports out there,” she said. “They are looking for other businesses with similar attributes, meaning high barriers to entry, often regulatory controls, long-term contracts and high visibility, and I would argue the aerospace aftermarket is a perfect sector for them.”