Aurelius Private Equity’s carve-out of airline caterer and onboard retail provider LSG Group International from Deutsche Lufthansa was far from a simple operation, with debt financing and currency complexities among the difficulties. But the firm’s belief in air travel growth meant that the deal was worth it, Dirk Markus, founding partner, told PE Hub Europe.
Expected to close in Q3 2023, the deal includes LSG’s catering, onboard retail and food commerce activities, its Sky Chefs customer service centres, as well as the Europe-based retail firm Retail inMotion – which sells packaged food on planes – and US-based SCIS Air Security Services. LSG is headquartered in Neu-Isenburg, near Frankfurt, Germany, although Lufthansa sold its Sky Chefs activities in Europe in 2019.
Munich-headquartered Aurelius is buying 100 percent of the business. The sale price was not disclosed but LSG has revenues of around $2 billion. It has 19,000 employees worldwide and serves 275 million airline meals a year.
Will those millions of meals still be served as consumers, businesses and governments focus ever more on carbon emissions? Markus believes so.
“We had intensive discussion on that,” he said. “Our hypothesis is we will continue to fly but it will be a different type of flying – hydrogen-based, green flying. Air travel is such a basic element of our daily lives. I don’t think the world will work without planes now.”
Other private equity firms to take a bullish view on aerospace lately include Tikehau Capital and OpenGate.
LSG’s non-airline business in the food commerce industry is also growing, Markus added, using its kitchens to prepare food to deliver to the likes of Starbucks and 7-Eleven, mainly in North America and Asia.
Core focus
Lufthansa decided a few years ago that it wanted to focus on flying and put LSG up for sale. But only the European operations sold before covid hit in 2020.
“That covid episode makes valuing such a company slightly more tricky,” said Markus. “Are we back to 2019 levels, or are still affected by covid? We believe business is back. North America is back above 2019 levels. Asia is not there yet, but China only reopened a few months ago.”
The reopening of Asia, especially China, will provide “almost automatic” organic growth for the firm. There is also growth potential for the non-airline part via add-ons of local businesses, while LSG believes there is an opportunity in a trend for airlines to give passengers the option to pay for higher quality food.
LSG’s potential convinced Aurelius to contact with Lufthansa around nine months ago. They worked in what Markus called a “very collaborative spirit” –necessary, given the complications of the carve-out of the company, which is active in 49 countries.
“You have all these airline kitchens, and you have cash in all these countries around the world, as these deals are typically done on a cash basis,” said Markus. “You have to get cash out of countries that are off the beaten track, or at least value that cash. That was one of the issues that took some time – how to make sure all this complexity was being accounted for.” Withholding taxes in some of those countries added to the complications.
Debt troubles
Beyond the idiosyncrasies, the dealmakers also had a problem facing all private equity firms. Debt costs had been rising for a year before the collapse of Silicon Valley Bank in March complicated the picture further.
“Would financing have been easier a year ago?” said Markus. “Definitely. Easier and cheaper. This is a larger midcap, those can be done. If this business was five times as large, would we have been able to finance it? I’m not sure.”
While some recent deals have introduced novel capital structures such as flexible payment schemes to tackle the debt problem, the LSG deal involved traditional bank financing with various tranches. Debt funds were considered as a backup.
“We managed to get a classic bank financing that has some ABL component as well as a cash-based component,” said Markus.
The payment involved a little structure, but that was more due to the complexity of the carve-out, said Markus. “It’s a bit unclear which money will be where and how much capital there will be in the business when closing happens. It’s more due to the nature of the carve-out than the times we’re in.”
Exit-wise, the business would “definitely” be a good IPO, said Markus, while a trade sale would be less likely due to the limited potential buyers.
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