Continental Aerospace Sold To U.S. Private Equity Firm (Arcline)

[Deb]

From AvBrief https://avbrief.com/continental-aerospace-sold-to-u-s-private-equity-firm/?utm_source=newsletter-239&utm_medium=email:

“U.S.-based Arcline Investment Management has announced it is buying Continental Aerospace Technologies from the Aviation Industry Corporation of China (AVIC) for total consideration of $535 million. The deal was announced June 8. Arcline has $30 billion in assets and among its holdings is Signia Aerospace, which owns Hartzell Aviation, Hartzel Propeller, Cleveland Wheel and Brake Systems and a half dozen other aviation concerns. Arcline describes itself as a “growth-oriented private equity firm” that “seeks to build the next generation of Industrial Compounders—market-leading, non-disruptible industrial platforms designed to consistently grow earnings over decades.”

“Continental was established in 1905 and built its first aircraft engine in 1929. Its engines are in tens of thousands of light aircraft. The company was bought by AVIC in 2011, which in turn bought German diesel aircraft engine manufacture Thielert out of bankruptcy in 2013. The company went public on the Hong Kong Stock Exchange in 2018. “Continental is a highly respected platform with a long history of engineering leadership, trusted customer relationships and mission-critical products that support the global general aviation fleet,” Arcline said in a news release. “The Company’s technical capabilities, large installed base and reputation for reliability fit naturally alongside our aerospace and defense systems and subsystems strategy.””

[PeteMc]

Just saw that.  It will be interesting to see what, if anything, happens with the parts and factory engines (new an reman). 

Did I read that Hartzell props took a bit of a price bump when Arcline Investment Management bought them?

 

[MikeOH]

1 hour ago, PeteMc said:

Did I read that Hartzell props took a bit of a price bump when Arcline Investment Management bought them?

 

A "bit of a bump"????  Not the description I'd use:

"Following the acquisition of Hartzell Aviation by the private equity firm Arcline Investment Management in late 2023, the company issued a new price list that implemented widespread price increases of 40% to over 160% across its product catalog"

[hammdo]

Gotta show profit quickly…

[PeteMc]

9 hours ago, MikeOH said:

widespread price increases of 40% to over 160% across its product catalog

I'd say more than just a bump! 

 

[GeeBee]

I hate PEGs but I hate the Chicomms even more. Judging by the sales price the Chicomms left town in a hurry. Arcline has been cutting prices on Hartztall props after their big price boost. I think they are learning the extent of their pricing power.

[1980Mooney]

21 minutes ago, GeeBee said:

I hate PEGs but I hate the Chicomms even more. Judging by the sales price the Chicomms left town in a hurry. Arcline has been cutting prices on Hartztall props after their big price boost. I think they are learning the extent of their pricing power.

Really?  Every time I look at my propeller on Ottosen (official Hartzell distributor) it goes up.  It is up to $39,545 now for a PHC-C3YF-2UF.

C3F00250 - HARTZELL PROPELLER - PHC-C3YF-2UF/FC7382/SM6 - Ottosen Propeller

Edited June 9 by 1980Mooney

[WilliamR]

29 minutes ago, GeeBee said:

I hate PEGs but I hate the Chicomms even more. Judging by the sales price the Chicomms left town in a hurry. Arcline has been cutting prices on Hartztall props after their big price boost. I think they are learning the extent of their pricing power.

Super curious how you arrived at your valuation vs sale price. Edited to add, I'm looking at CapIQ now and they have some numbers which I am dubious and only as recent as '23. Even with some standard add-backs I only get ~$7.5MM in LTM EBITDA which seems low but, leverage seems about where I would expect based on that EBITDA (6.5x). You have something more recent? What does your EBITDA Bridge look like?

Edited June 9 by WilliamR

[shawnd]

16 hours ago, MikeOH said:

A "bit of a bump"????  Not the description I'd use:

+100

[GeeBee]

5 hours ago, WilliamR said:

Super curious how you arrived at your valuation vs sale price. Edited to add, I'm looking at CapIQ now and they have some numbers which I am dubious and only as recent as '23. Even with some standard add-backs I only get ~$7.5MM in LTM EBITDA which seems low but, leverage seems about where I would expect based on that EBITDA (6.5x). You have something more recent? What does your EBITDA Bridge look like?

"Consideration of 535 million" for a company that powers every Cirrus, Beech recip along with numerous drones, seems a bit weak to me.

[201Steve]

Couldn’t get much worse than the current state of engine manufacturing. You couldn’t buy a new engine even if you wanted to 90% of the time at current. 

[WilliamR]

Oh, a wild guess. Too bad. Was hoping for some insight. 

35 minutes ago, GeeBee said:

"Consideration of 535 million" for a company that powers every Cirrus, Beech recip along with numerous drones, seems a bit weak to me.

 

[GeeBee]

10 hours ago, WilliamR said:

Oh, a wild guess. Too bad. Was hoping for some insight. 

 

Ever see the movie The Accountant and the pizza factory? One thing is for sure. If CA is only worth 535 the complaints on this site about pricing are deeply misguided.

[WilliamR]

I don't know, man. I'm just an Investment Banker at a tier 2 firm who covers and has put a couple hundred million into this space. 

Still don't know how someone could say something is over or underpriced if they don't know Adj. EBITDA or even topline, but that's where my stupidity shows. I did only go to a tier 2 business school (Emory-Goizueta). So, it's likely I'm dumb as a post.

Thanks for the education.

 

 

[GeeBee]

I will tell you what I think of EBITDA. It is BS, BS. (Business School BS.) As Warren Buffet said, "When someone talks EBITA I run like hell".

This more likely the cause of quick exit.

 

https://avbrief.com/update-continental-put-on-pentagon-china-list-just-before-sale-announced/?utm_source=newsletter-240&utm_medium=email

[1980Mooney]

16 hours ago, GeeBee said:

"Consideration of 535 million" for a company that powers every Cirrus, Beech recip along with numerous drones, seems a bit weak to me.

If you are driving by looking in the rear view mirror, it may seem impressive but look at current sales and future growth potential is meager by historical standards,

In 2025 the only new built planes with Continentals were 15 Daimond DA-50, 155 Cirrus SR-22, 384 Cirrus SR-22T, 6 Beechcraft G36 and 5 Beechcraft Baron G58 (10 engines total)

• That's only 570 engines per year on new aircraft.  If they sell at an average of $120,000 that is only about $70 million revenue

Cont claims that there are 2,000 CD engines in service including GA conversions, but new DeltaHawk offerings will be eating their lunch in the future.

Drones? - maybe the CD series diesels power some (likely already in the above number) but lots of future competition from simpler engines like DeltaHawk.

Existing fleet of SEP is about 140,000 but most are Lycoming. - let's say 60,000 are Cont.  Existing fleet of 13,000 piston twins with more Cont - let's say 9,000.  Assume 15 year life that is 4,600 per year in partial replacement (overhaul, rebuild and sometimes completely replace).  Assuming $50-60K is spent on Cont parts on average that may generate about $250 mil in parts, and Reman/OH/New engine sales per year to maintain the existing fleet.

Cont may have been generating $400 mil in Revenue.   @WilliamR - curious what '23 Revenue did CapIQ show?

21 hours ago, WilliamR said:

Super curious how you arrived at your valuation vs sale price. Edited to add, I'm looking at CapIQ now and they have some numbers which I am dubious and only as recent as '23. Even with some standard add-backs I only get ~$7.5MM in LTM EBITDA which seems low but, leverage seems about where I would expect based on that EBITDA (6.5x). You have something more recent? What does your EBITDA Bridge look like?

Private Equity invests only to exit - ideally at a higher price.  They have to grow revenue and/or cut costs.  Pump And Dump.

Where is Arcline going to get more EBITDA? (or Profit if EBITDA is too offensive to some)  But this is not a growth business.  Attrition from crashes, corrosion and age will be shrinking their largest market of maintaining the fleet.  DeltaHawk is working on new 6 cylinder offerings to take away Conti's new build market.

Aluminum (London price now at Covid level peak andUS paying higest in the world with Import Tax on top of that)  and labor costs are rising.  The only lever they have is to raise price.....

 

Edited June 10 by 1980Mooney

[WilliamR]

Sorry, I only looked at AVIC on CapIQ. There's no Conti breakout. Just too small. Also going back I see AVIC is way larger than I thought. So, my $7.5MM of LTM EBITDA is actually $7.5BN and that's for AVIC not Conti.  As I noted, I'm dumb as a post. Sorry for the confusion.

I will say, AVIC has ~$14BN in balance sheet cash alone. Guess they really needed the money from this sale. Ha!

Thanks for educating me @GeeBee. Never did read how you do your valuations other than by feel. What EBIT (since you don't like EBITDA because you saw a Berkshire video on why CapEx lower than DA is bad) multiple do you think this was sold for again? What EBIT (reported or adjusted, your choice) valuations have you seen in this vertical again?    

 

 

 

[GeeBee]

When it comes to the Chinese, I don't believe any financial statement or prognostication. Even the government numbers are BS. Hindenburg used to make good money shorting the Chinese because their thinking is the same as mine. 

[Justin Schmidt]

It is always good when we get Chinese off an American company.  The worst thing to happen was Nixon getting us involved with them. 

[TGreen]

Given that Continental is a crucial supplier to Cirrus and AVIC owns Cirrus, wonder why AVIC would surrender control of this supplier for cash that it does not need. Wonder if this suggests that AVIC is also shopping Cirrus. 

[Schllc]

21 hours ago, WilliamR said:

Sorry, I only looked at AVIC on CapIQ. There's no Conti breakout. Just too small. Also going back I see AVIC is way larger than I thought. So, my $7.5MM of LTM EBITDA is actually $7.5BN and that's for AVIC not Conti.  As I noted, I'm dumb as a post. Sorry for the confusion.

I will say, AVIC has ~$14BN in balance sheet cash alone. Guess they really needed the money from this sale. Ha!

Thanks for educating me @GeeBee. Never did read how you do your valuations other than by feel. What EBIT (since you don't like EBITDA because you saw a Berkshire video on why CapEx lower than DA is bad) multiple do you think this was sold for again? What EBIT (reported or adjusted, your choice) valuations have you seen in this vertical again?    

 

 

 

Unfortunately, balance sheet cash is not a secure indicator. 
look at what happened to tidewater in less than 18 months.

The challenge with financials is you have to have some way to measure and compare. But at some point they become like mark twain said about statistics. 
 “Lies, damn lies, and statistics….”

[WilliamR]

20 hours ago, Schllc said:

Unfortunately, balance sheet cash is not a secure indicator. 
look at what happened to tidewater in less than 18 months.

The challenge with financials is you have to have some way to measure and compare. But at some point they become like mark twain said about statistics. 
 “Lies, damn lies, and statistics….”

Your funny! So, when you're doing your financial analysis, you don't include balance sheet cash as liquidity? Interesting. How does one asses a Company's ability to fund working cap absorption or cash burn due to growth capex without a liquidity analysis? Or do you value untapped bank revolvers more? I value revolver availability less than cash, but as I've admitted, I'm not well educated.

Sorry, not familiar with Tidewater. Guessing it's in a vertical I don't lead. If fraud then how do you structure around that? I'm proud to say I've helped a buddy terminate an underwrite after I saw saw red flags from fraud he didn't https://www.sfnet.com/home/industry-data-publications/the-secured-lender/magazine/tsl-article-detail/part-1-allou-a-firsthand-account-of-a-massive-abl-fraud. I worked at Wachovia Capital Finance before the Congress Financial merger (FYI, Congress was a lender to Mooney at one point).

On Conti financials, everyone knows Arcline had a QofE done with the standard testing, right? Pretty sure JPM did one as well. 

@TGreen I too wonder if AVIC is shopping Cirrus. I was looking at Cirrus's FY25 annual report audited by PWC. Super impressive. That would be right up Arcline's alley. Wish they would have bought Mooney, but they don't do turnarounds. 

I put my credentials against anyone here. I lead underwriting in our Metals, Infrastructure Services (includes FBOs), Environmental Services verticals. I also do a lot of underwriting in ADGS (GA manufacturing included in the A part of that acronym) and Business Services. I have a great track record deploying billions in capital without a write-off in my multi-decade career. Anybody here doing the same? I may actually know what I'm talking about. My name is William P. Rutkowski in Atlanta and can be found on LinkedIn. Heck, connect with me. Always happy to connect with a Mooney owner/enthusiast.

This has been a great distraction and a lot fun, but I'm done. Gotta focus on my in market acquisition financings so I can work less this weekend.

Best

[Schllc]

2 hours ago, WilliamR said:

Your funny!

Wow, very tempting to write a witty retort to that screed, but I will resist the urge.  
Instead I’ll just hope you buckled down so you don’t have to work this weekend  

 

[201Steve]