It has been a year since investment firm Patriarch Partners bailed out MD Helicopters (MDHI), the ailing US manufacturer of light helicopters. It has been a year of some progress, but also major setbacks, and if - as speculated - the new owner is fattening MDHI for sale, more feeding may be needed.
For years, the US helicopter was considered overdue for consolidation, with stagnant civil sales and meagre military markets, but that has changed beyond recognition. Commercial sales are soaring and military backlogs bulging. Among US manufacturers only MDHI seems to have missed the recovery.
Many analysts see the helicopter sector as being ripe for consolidation because of its fragmentation, and the swallowing up of MDHI is one of several possibilities being speculated about. But whether any major manufacturers, with their new-won health, feels the urge to acquire remains to be seen.
After taking control of almost-bankrupt MDHI from Dutch industrial concern RDM, New York-based Patriarch also picked up helicopter completion specialist Heritage Aviation, a move chief executive Lynne Tilton proclaimed would create "an aerospace platform that not only produces aircraft, but one that also controls its own destiny by bringing much of its supply chain under its own umbrella".
But that control has proved elusive. The first of two major blows to the company came in June, when it lost the US Army's 322-aircraft Light Utility Helicopter (LUH) competition to Eurocopter. The second came last month, when the Government Accountability Office (GAO) denied MDHI's protest over the LUH decision with some critical comments on the company's management capabilities.
Last week, Patriarch executive Charles Vehlow was appointed president of the Mesa, Arizona-based manufacturer, taking over day-to-day operations - a move intended to "bring the MD Helicopters name back to prominence and its rightful place in the helicopter world", Tilton says.
It is a place MDHI has not held for some time. Originally Hughes Helicopters, the company was purchased by McDonnell Douglas then became part of Boeing, which decided to sell off the light helicopter business. Bell was blocked from buying MDHI by US authorities and the company was instead purchased by RDM, but was never adequately capitalised, at least until Patriarch came along.
Sikorsky has been talked about as a purchaser of MDHI, as its product line seems an ideal fit, filling a gap in the larger manufacturer's commercial range, and its Schweizer light helicopter line has the same design DNA as MDHI's. But Sikorsky purchased Schweizer in 2004 as much for its rapid prototyping and unmanned air vehicle capabilities. It is not obvious the company feels the need to fill the gap.
One Paris-based analyst says Sikorsky is believed to have been near a deal to buy MDHI last year, and might be unwilling to pursue the same path again having been unsuccessful once. And while MDHI might be in a more stable position with regard to its suppliers than 12 months ago, "from a financial and technical point of view, and after reading the GAO decision on the LUH, it seems to me MDHI is in a bad position", he says.
Even so, consolidation may be an increasingly important theme in the years to come. Analyst Robert Stallard of Bank of America argues that some reorganisation of the industry is likely: "I would say that further consolidation in helicopters, particularly the military arena, is a realistic expectation."
Stallard rejects the view that bulging orderbooks remove any incentive for consolidation. "Things may be healthy, but looking longer-term there are probably not enough new military helicopter programmes to sustain this many independent manufacturers," he says.
Sensitivities over foreign ownership of US military technology should not be insurmountable, Stallard says. "Unlike some other areas of defence, I doubt whether a foreign purchase of a US helicopter company would be blocked, but it could still face a rough ride with elements of Congress," he says.
The possibility of Finmeccanica attempting to buy Bell Helicopter from Textron has been raised several times, and such a deal would seem to make sense for the Italian company. For its helicopter subsidiary AgustaWestland it would build on the companies' joint programmes to increase its market footprint in the USA.
But Finmeccanica would face scrutiny from US authorities if it attempted to buy into key military programmes, including the V-22. And, while Finmeccanica's reasons for wanting to buy Bell are clear, the logic behind Textron getting rid of an asset that is performing well is less obvious. Bell made profits of $368 million in 2005 on revenues of $2.9 billion, and accounted for 29% of Textron's total revenues and 32% of its profits.
"The biggest obstacle to further consolidation at this point is probably an unwillingness to sell," Stallard says. "There are a number of combinations that would probably create a stronger helicopter industry, but no-one seems to want to bow out." So perhaps the rotorcraft industry will heed the old proverb "let sleeping dogs lie" and wait for a downturn to spark mergers and acquisitions.
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Source: Flight International
