Westwind Partners research on Discovery Air/Top Aces deal

Here is a short note from Westwind Partners’ research head John Grandy on the acquisition of Top Aces by Discovery Air (DA.A:TSX).

“Discovery Air Announces Top Aces Acquisition

Insight or Development:

Discovery Air has entered into share purchase agreements to acquire Top Aces Inc. (Top Aces), an approved supplier to the Canadian federal government of airborne training services to the Department of National Defence.

We will be updating our model upon obtaining additional financial guidance on the incremental impact of the acquisition.

Analysis:

Top Aces Inc., based in Pointe Claire, QC, is the exclusive supplier of Combat Support services to the Department of National Defence (DND). It is the first and only Canadian civilian company hired by DND to provide airborne combat training support to the entire armed forces: air force, army and navy.

In 2005, the Government of Canada awarded Top Aces three national standing offers to provide fast jets for Canadian Forces training exercises, including simulating hostile aircraft, towing targets, testing radar and communications performance, as well as providing airborne support for air defence. These standing offers are valid for a three-year period, with two one-year renewal options. These offers are valued at up to $93.9 MM for three years.

Although subject to a number of conditions, including successful financing arrangements and regulatory approval, closing of the acquisition is scheduled on the later of August 1, 2007 or 10 days after necessary conditions have been met. The expected purchase price is $35 MM cash plus 20 MM Class A common shares of Discovery Air, with the cash portion to be financed through debt.

Company guidance is for annual revenue of $30 MM from this acquisition, with EBITDA margins in line with previous platform acquisitions. Based on this guidance, incremental EBITDA is expected to be approximately $8.6 MM, which implies a purchase price multiple of approximately 7.6x EBITDA (assuming no assumed debt). We presume, however, that Top Aces has some debt; as a result, the purchase price multiple may prove to be somewhat higher. Further financial details will not be provided until closing. DA currently trades at about 6.3x EV/EBITDA.

Top Aces operates a fleet of eight modified Dornier Alpha Jet aircraft that have been customized to meet DND training requirements. The company also operates a fleet of four Special Mission configured Westwind aircraft, modified to support Target Tow and Electronic Warfare missions for the DND. Top Aces also provides Aerospace Consulting and Project Management Services to private industry, military and civilian government agencies, commercial flight departments, and aerospace training centres.

This appears to be a major acquisition for Discovery Air. We will be updating our model upon obtaining additional guidance.

Conclusion:

At this stage, our forecasts remain unchanged as we await further clarity on the acquisition. However, there may be further upside from what may prove to be an exciting deal. We maintain our BUY rating and $2.25 target.”

MRM
(disclosure – I’m a director/shareholder of Top Aces, and various Wellington Financial entities and affiliates are shareholders of TA)