Against the odds

Candover's SFR580m acquisition of Swissport, completed in February 2002, was both unusual and notable for a number of reasons. For a start, the industry sector became a no go area half way through the process following the events of September 11. Then, the vendor of the business filed for bankruptcy. But despite these setbacks, Candover not only went ahead with the deal but also stuck to the spirit of the exclusivity agreement it had signed in August, including the basis for the transaction price of just over 7x adjusted prospective EBITDA – despite the fact that the business environment had altered significantly.

Candover had worked hard to get close to the deal. In August 2001 it beat off a number of private equity bidders for the purchase of Swissport which SAir Group, the parent of Swissair, had put up for sale. Due diligence was complete by the week commencing September 10, but after what happened next that week, Candover knew it would have to start over again. Fortunately by the end of the month a revised view of the business had been formulated and momentum was again building. When, on October 4, the SAir Group entered bankruptcy proceedings, the sales process stalled again, but Swissport was not affected directly because it was operating as an independent business within the group.

As the deal began to look increasingly healthy, debt needed to be arranged. Initially few institutions were willing to contemplate exposure to the airline sector post-September 11. However Royal Bank of Scotland did take a look, albeit on a conservative basis, and in the end succeeded in arranging a syndicate consisting of Bank of Scotland, ING, WestLB, HypoVereinsbank, Duke Street Capital and ICG. SFr205m of senior debt was drawn, a multiple of 2.5x. ICG arranged and underwrote a SFr130m junior mezzanine facility, but Candover were still left to put up around 45 per cent of the total funding structure in equity.

For a financial sponsor to commit to this kind of equity outlay, one would expect the underlying business to be pretty special. Candover clearly saw a great opportunity, yet who would have thought the subject of such affection could be a company that is responsible for taking bags off a conveyor belt and making sure they end up on an aeroplane?

Much of the answer is to do with the potential upside that Swissport promises to generate. Baggage handling is still mainly carried out by the airlines themselves, and independent companies only account for around 15 per cent of the market. Spread thinly around the world, the independent sector is now undergoing a phase of consolidation that is far from complete. If anything, it is likely to intensify, accelerated by the events of last September. Swissport, already the second-largest independent competitor in the sector, is poised to play an important part in this process and not only to grow through acquisition, but organically as well, as airlines revisit their core operations and cost structures.

Furthermore, if one already has the physical presence, there is no reason why ground-handling activities cannot be broadened to include cargo handling, security, passenger handling, etc. As airlines focus simply on customer service issues and promoting their brands, there is increasingly room for companies such as Swissport to move into.

Add to that Candover's trust in the management team, and it is easy to see why the firm just weren't about to let go of the deal at any point. The fact that Swissport managers succeeded not only in running the company throughout the market turbulence but also to sell it would suggest that Candover was enthusiastic for the right reasons.

Today, according to the private equity house, the deal is on course. The rebound in activity has been quicker than expected and, according to one insider, ?the management team are still talking to us?. Proof indeed that opportunity exists in unexpected places.