A low-profile U.K. company serving the private jet business is suddenly making some very big friends.
Funds managed by Blackstone Group Inc. have teamed up with Microsoft Corp. co-founder Bill Gates in an attempted $4.3 billion bid for Signature Aviation Plc. It’s a formidable partnership that rival investment fund suitors Carlyle Group Inc. and Global Infrastructure Partners will have a tough job seeing off. But expect Nigel Rudd, Signature’s chairman and a veteran U.K. industrialist, to do his best to get an auction going.
Signature (formerly BBA Aviation) operates ancillary services like hangars, plane maintenance and, above all, refueling for small airfields. Its business dynamics are peculiar. On the one hand, there’s some cyclicality to performance. But over the long term, there are similarities to an infrastructure asset, implying the potential to hold above-average levels of debt. Nearly 90% of revenue is from the U.S.
If Signature was already private, it might not consider a listing at all, let alone one in London. Stock market investors, especially U.K. funds, tend to be more conservative about leverage. Blackstone has been trying to buy the company since February and got its target’s backing for a $5.17-a-share bid last month. With others sniffing around, Blackstone upped the ante on Friday revealing that Gates’s investment fund, Cascade Investment LLC, has partnered with the U.S. private equity firm on its bid. Cascade and affiliates already have 19% of Signature, and the fund will vote against any alternative proposal that comes after it and Blackstone have made a firm offer.
This makes life very hard for any interloper. A rival offer with a 75% acceptance threshold (as required under the U.K.’s simpler “scheme of arrangement” bid process) would likely fail depending on shareholder turnout. The gate-crasher would have to aim to get simple majority control, and then hope Cascade might either sell or partner up later, or stay on as a friendly co-investor. Not impossible, but hard.
Blackstone’s bid involves a longer-term private equity vehicle and an infrastructure fund. Global Infrastructure Partners is a dedicated infrastructure fund. Auctions involving such buyers can get heated: Their perspective tends to be in decades, with assets held on a perpetual basis. That means the returns expectations are much lower than for a private equity transaction, and the prices paid tend to go higher. Analysts at United First Partners reckon Blackstone-Cascade could sweeten their proposal by 5%-12% and still achieve a long-term internal rate of return of 10-12%, typically sufficient for an infrastructure fund.
Doubling down on the private-jet market is a tricky look for Gates. For the deal to make the slightest sense from an ESG perspective, Cascade needs to have a clear plan for reducing emissions here.
While the Blackstone approach is more than 50% above Signature’s undisturbed three-month average price, the market is betting on a higher offer. That’s clearly something of a gamble given the circumstances: Its pitch isn’t even binding yet. Signature is a sizeable asset, it’s not the only way of getting exposure to this industry. Rudd has presided over the sale of some high profile U.K. firms in his time. Even for him, getting an auction going here is going to be a challenge.
This article was provided by Bloomberg News.