Permira positions Topcast as pan-Asian roll-up play

For evidence of private equity’s soft spot for aviation aftermarket services, look no further than StandardAero. The US-based provider of aircraft parts and maintenance services has changed hands four times in the past 15 years. There have been three PE owners, with The Carlyle Group buying the business twice, most recently from Veritas Capital last year. It was one of a string of deals in the space involving financial sponsors.

GPs often enter with a consolidation agenda. StandardAero has completed numerous bolt-on acquisitions. Last month, when Platinum Equity bought parts distributor Wesco Aircraft from a PE consortium – which included Carlyle – the first order of business was a merger. Permira is keen to execute a similar strategy in Asia with Topcast Aviation Suppliers as the anchor asset.

“We think this is a potential roll-up opportunity,” says Alex Emery, the private equity firm’s regional head. “No one has tried this in Asia with independent aircraft parts distributors, but it has been an ongoing theme in the US. By acquiring what we think is the best platform we can expand the business through M&A and organic growth.”

Permira has bought Topcast for an enterprise valuation of $300 million, according to sources familiar with the situation. There is a succession element to the deal, with Topcast’s founders in their 60s and looking to transition out. But they are re-investing part of the proceeds and will remain involved in the business as it looks to capitalize on rapid growth in Asia’s aviation market. While Permira plans to augment the management team with more executive talent, this will happen gradually.

The Topcast founders are said to have run a limited auction process and engaged with strategic investors from Europe and the US. Ultimately, the decision to sell to private equity was in part motivated by a desire to preserve the brand and retain a degree of management autonomy. This is in keeping with the company’s origin story: it was created in 1991 by a team that spun out from industry behemoth Aviall because they saw an opening for an independent player in Asia.

Faucets to carpets

Headquartered in Hong Kong and with 19 offices in Asia, the Americas, and the UK, Topcast connects suppliers with airlines, maintenance, repair and overhaul (MRO) specialists, and original equipment manufacturers. It also provides technical support and maintenance services, with a repair station in Hong Kong that operates as a service center for many of the products it sells.

The bulk of Topcast’s business involves supplying replacement parts to airlines. Cathay Pacific had a fleet of 216 aircraft as of June and spent HK$4.7 billion ($600 million) on maintenance over the preceding six months. It was the company’s fifth largest outlay after fuel, staff, landing costs, and aircraft depreciation. While there is likely to be a single designated supplier for key equipment such as engines and cockpit computers, smaller-ticket items might be sourced from multiple vendors.

Topcast’s product line card includes batteries, faucets, cargo loading systems, audio control panels, seat components, lighting systems, circuit breakers, landing gears, and carpets. Everything must be pre-approved for use on specific kinds of aircraft. The company works with more than 800 suppliers and has over 1,000 customers. Part of the marketing pitch is that its neither Aviall nor Satair, which are affiliates of Boeing and Airbus respectively, so there is no bias when serving a multi-brand fleet.

“The suppliers typically served by Topcast and other independents are smaller manufacturers, with annual revenues of $1 billion in revenue and below. It is not the likes of Honeywell and United Technologies that have direct access to airlines anyway. Small manufacturers matter less to Boeing and Airbus. An independent provider can do these external approaches and make sure you are a valued supplier,” says Marco Persico, an investment director at Permira.

According to brokerage Canaccord Genuity, Aviall and Satair control 50% of global parts distribution. Permira claims Topcast is by far the largest independent operator in Asia and has comparable market share to the two captive businesses in key markets like China. The mainland accounts for 45% of revenue, much of it coming from Air China, China Southern Airlines, China Eastern Airlines, and Hainan Airlines. Flag carriers are important customers in other Asian markets as well.

Growth agenda

The International Air Transport Association (IATA) projects that 7.2 billion passengers will travel in 2035, nearly double the 2016 figure. There will be 1.8 billion new passengers in Asia Pacific, taking the regional total to 3.1 billion. China alone will account for 1.3 billion, surpassing the US as the world’s largest aviation market by 2024. To meet this demand, China will need to add more than 7,400 new passenger aircraft and freighters to its fleet between 2018 and 2037, according to Airbus.

“Asia generally – and China in particular – is the fastest growing market in the world in terms of delivering new Boeings and Airbuses and ultimately the number of passenger kilometers being traveled,” says Emery.

Permira expects demand for aftermarket aircraft parts and services in Asia Pacific to grow at a compound annual rate in excess of 10% over the next 10 years. Demand will be driven not only by increases in fleet size, but also the region’s relatively young stock of existing aircraft getting older. The average age of Air China’s 684-strong fleet was 6.7 years at the end of 2018. This compares to 956 planes and 10.6 years at American Airlines.

In this as in other matters, the firm believes Asia will follow a similar evolutionary path to the US. “The average age of the US aircraft fleet is among the highest and the aftermarket for parts has developed over decades,” Persico says. “The broader the footprint, the more efficiently a distributor can represent suppliers, so there has been a natural consolidation effect. Private equity players have been pursuing roll-ups while Boeing and Airbus – which only entered the space in the last 10 years or so – are buying large independent distributors.”

Topcast represents Permira’s ninth deal in Asia, with EUR3.2 billion ($3.5 billion) in total capital deployed. The firm tends to focus on sectors and business models where it can point to successful case studies in other markets. Past investments in aviation services include maintenance and refurbishment service provider Jet Aviation, which was sold in 2008 after a three-year holding period, generating a 3.9x return.

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• Topics
• Greater China
• Buyouts
• Support services
• Asia
• Permira Advisers
• Transportation