Playing the long game: PAI acquires Swissport

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Ferrovial successfully concluded the sale of Swissport to PAI Partners, the European private equity firm in February 2011. The announcement followed the closing of a secured bond to a worldwide investor base which underpinned the deal. The bond amounted to close to €590 million and, together with the equity of €350 million, made the total transaction value close to €940 million. With the acquisition complete, the stage is now set for the next phase of Swissport’s evolution. Ricardo de Serdio, Partner in PAI Partners, explains to Jo Murray

There was nothing impromptu about the sale of Swissport to PAI Partners. In fact there has been a long period of relationship-building between the two businesses as well as Swissport’s owners – Ferrovial – stretching over the last decade. When Candover bought Swissport as far back as 2001, PAI was on the scene showing an interest. Then, when Ferrovial acquired the handler in 2005, PAI was also an interested party but the pricing was set too high.

By the same token, Swissport has not been an isolated handling company on PAI’s radar. The private equity company has been watching the fortunes of several of the big names in handling over several years but it was the Swissport deal that really captured its imagination and finally crystallised into an acquisition during the latter half of 2010.

Handlers could be forgiven for being unfamiliar with the name PAI Partners – it is hardly synonymous with aviation; in fact it has no other aerospace companies in its portfolio. What it does have is a Business Services Group which follows closely the development of the ground handling sector with a view to complementing its existing investments in services companies.

There is no doubt that PAI undertook forensic inspection of the ground handling industry over the last decade; but it also pursued intimate knowledge of Ferrovial – the Spanish conglomerate with a heavy focus on construction that is controlled by the founding family. The executive chairman of Ferrovial is the major shareholder and, along with his siblings, owns around 50% of the business.

Of course the Spanish construction industry has been famously troubled in recent years and it is well known that Ferrovial – with an enterprise value of about €26 billion – has been looking to divest non core assets in order to focus on its core transport infrastructure business. The negative impacts of the very severe slowdown in Spanish building created additional incentive for selling Ferrovial assets.

PAI had built strong relationships with Ferrovial management as a consequence of the private equity company’s continuous interest in Swissport as an acquisition target. PAI management had also become acquainted with Ferrovial’s major shareholder.

“We knew that Ferrovial had done an internal analysis through which they had identified which were core assets and which were non-core assets that could be put up for sale,” says de Serdio. “We also knew that one of the assets they had identified as non-core was Swissport. However, we knew too that the management team of Ferrovial had recommended timings of potential sales. In the case of Swissport, on the one hand they had decided it was non-core, but on the other hand the management team had recommended not to sell the company for the time being because they thought it was going to benefit from the recovery of the market and certain restructuring policies that they had been evolving.”

As a consequence, PAI was challenged to find a way in which to unlock this stalemate situation. PAI made it clear to Ferrovial that it was interested in the asset and, given that Ferrovial appeared to be immovable in terms of timing, PAI proposed something less than outright acquisition of Swissport: 50% only.

“WE marketed the idea that, by doing this, Ferrovial would unlock some cash but would also remain exposed to the potential upside that it saw in Swissport. Management was quite positive to that idea and so we started working on the due diligence with this possible outcome in mind,” says de Serdio, speaking of the period Spring/Summer 2010.

Of course PAI was not alone in knocking on Ferrovial’s door seeking a shoe in to acquire Swissport. But all comers were hearing the same answer from Ferrovial: “Swissport is not for sale at present; it is not the right time.”

The discussions with Ferrovial from PAI’s point of view focused on governance, exit and the shareholders’ agreement. After all, what would essentially be a partnership had to work from an operational point of view as well as from a financial perspective. “Finally, we convinced Ferrovial’s management that our proposal was a good opportunity for them, they were clear that they could do something with us and so we carried out all the due diligence,” says de Serdio. In tandem, PAI always maintained their offer to buy up to 100% of the company if Ferrovial were to change its mind and favour an outright sale.

From August 2010 until mid-October, PAI finalised the due diligence and the negotiations with the management team of Ferrovial to acquire 50% of Swissport.

Eventually the Ferrovial board, after a long debate, reached a conclusion to sell 100% to PAI, an outcome for which PAI had also prepared itself.

In the end, the deal relied heavily on the forging of relationships. De Serdio says that the Swissport management team was also excited about working with PAI as a shareholder. “We shared the same view of the business going forward. We both thought there was continued outsourcing potential for the company, there was continued consolidation potential going forward and we were happy to support Swissport in terms of human resources, contact and financial means to make the most of consolidation and growth opportunities.”

In tangible terms, what exactly does PAI bring to the equation? Although there are no other aerospace companies in the portfolio, there is a French services company called Spie which specialises in electrical, mechanical engineering, energy, communication networks and railway infrastructure. It, like Swissport, is multi-locational: Spie operates from 400 locations in 25 countries, of which 380 in Europe.

“Spie is very similar to Swissport in terms of controlling a lot of people working in different places undertaking a lot of activities that you need to control well, develop KPIs well and perform a service to clients that is profitable to you but is also of the best quality possible to your clients,” points out de Serdio. PAI has undertaken more than 40 acquisitions through Spie over the last four years. PAI, through its Business Services Group, has also undertaken copious research of the ground handling sector and its players so it is clearly knowledgeable about who is providing what and at what margin.

And de Serdio is clearly in tune with the prospects for aviation as it climbs out of its down cycle and heads back up the curve. “We see that the global trend is an upward trend. With an average growth of 4-6% and an outsourcing trend set to continue (and we expect it to increase), there is a third potential upside: hub outsourcing. The only company that is credible to do that and has actually done that recently is Swissport,” says de Serdio. “The global drivers are all very positive for Swissport.”

He continues: “There is also consolidation potential – not so much in terms of large acquisitions but smaller companies that have a good solid position at certain airports with certain airlines. These could be interesting to add on to Swissport. This is another potential upside in terms of growth potential.” PAI has created an M&A committee to this very end.

Of course any private equity participant is going to invest with a clear exit strategy in mind although options tend to remain fairly open in the early stages. “At this point in time, the most likely exit route that we have in mind would be an IPO,” says de Serdio. “We think that Swissport is a world-leader in its sector, not only in terms of size but also in terms of quality of service and brand name. Together with a track record of many years of growth – which we expect to continue and even accelerate – we think this will create a very appealing equity story.” Of course the bond placement has already confirmed to PAI that this is likely to be the case.

When the PAI acquisition of Swissport was announced, it made it clear that the sale will have no impact on Swissport’s clients, staff or management team. Does that continue to be the case in the longer term? “For all the businesses we have owned we have wanted to run them efficiently and we have wanted to provide the best possible service as we think this is the key differentiating factor behind the service business,” says de Serdio. “Swissport, its management and Ferrovial as a shareholder had been doing things right and have been working in the right direction, trying to make a difference compared with their competitors. Hopefully we will increase that and boost the quality of the service.”

De Serdio concludes: “We want to make the gap between Swissport and their competitors even wider.”