A fresh wave of consolidation among small players in the aerospace supply chain is imminent. That is the assumption that has led private equity firm Privet Capital to buy UK component manufacturer Thermal Engineering, with a view to pursuing follow-on acquisitions in six to nine months.
Two-year-old Privet styles itself as a "turnaround investor" that "arranges capital for high-potential firms experiencing financial stress and in need of operational and financial input to return them to profitability and growth". Founded by 3i and Deloitte alumnus Stephen Keating, it has previously acquired furniture retailer Lombok and soft drinks manufacturer Silver Spring.
Precise details of the Thermal transaction have not been disclosed, but with turnover of roughly £10 million ($16 million), the acquired company falls at the lower end of Privet's target range. The acquirer's "typical approach" is to "invest £1-£10 million in companies with £10-200 million turnover" and then "exit in one to four years". Thermal's banker RBS has agreed to support the Privet buyout, although a Citi credit line has been arranged to replace part of the RBS debt.
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© Max Kingsley-Jones/Flightglobal |
With a base at Royston and a workforce of 200, Thermal specialises in hot forming and cold forming of hard aerospace alloys. It also supplies sheet metal components and assemblies, as well as thermal insulation and protection. Its products feature on all Rolls-Royce's Trent engines, including the Airbus A380-powering Trent 900.
The range of civil and military engine programmes it has served also includes the CFM International CFM56 and International Aero Engines V2500 powerplants, plus the Europrop International TP400 and Eurojet EJ200 that power the Airbus A400M military transport and Eurofighter Typhoon fighter.
"We see it as a very good quality engineering business with a lot of technical know-how," says Privet director Ian Slater. "Also, there's an industry dynamic that we find quite interesting: we expect the suppliers and manufacturers at the smaller end to be consolidating over the next few years." With the aerospace market moving in the direction of its automotive counterpart, toward fewer suppliers to OEMs and tier-one manufacturers, there is "a good opportunity for selective acquisitions", says Slater.
He sees the likely timeframe for such transactions as "medium term", which he defines as "six to nine months onwards".
As to how Thermal became a candidate for turnaround, Slater notes the industry's "very difficult 18 months to two years", adding: "The OEMs and tier-one suppliers have managed their own pipelines very well, but there's definitely been a de-stocking in the industry that's led to a fall in demand."
TURNAROUND TACTICS
Privet intends to boost Thermal's fortunes by providing the cash-constrained company with working capital to pursue capital expenditure and investment in new tooling for new projects. It has also brought in Vardhan Rajkumar - formerly a director at telecoms engineering company Trylon TSF - to serve as chairman.
He replaces Jeff Milton, who founded Thermal in 1988 and is retiring. Slater cites "professionalising the manufacturing process" as a goal of Thermal's new management, aimed at bringing "wider industrial expertise" to a company "strong on aerospace knowledge and engineering".
Alongside a review of production operations focused on the need to "get orders out the door quicker", Privet intends to revamp Thermal's sales proposition. Slater describes the company as "almost a well-kept secret", rated highly for its engineering capabilities, but "not necessarily visible to all the people that it should be".
Action will be taken quickly. "We tend to be impatient," he says. However, there are no plans to reduce headcount. "We actually expect to increase the staff numbers, if anything," says Slater. Thermal, he reckons, has "a strong position on the Trent 700, which will underpin the business for the next few years" and it is positioned on "the new exciting programmes": the Boeing 787-powering Trent 1000 and the A350's Trent XWB.
As far as exit strategies are concerned, Slater expects Thermal to be "a longer hold" given anticipated acquisition opportunities. "We could see it growing to a reasonably significant sized group [and] an IPO or a trade sale would be a likely exit," he says.
Source: Flight International
