Private equity firm Stonepeak has agreed to buy publicly traded Air Transport Services Group, a leading lessor of mid-size cargo jets that also provides flying and other services for customers like Amazon, for $3.1 billion.
The New York-based investment firm will pay $22.50 per share in cash for ATSG and its aviation subsidiaries, which represents a 29% premium above ATSG’s closing price on Friday and 45.5% more than its volume-weighted average price over the prior 90 trading days, ATSG (NASDAQ: ATSG) announced Monday.
The price values the company at about 5.8 times earnings before interest, taxes, depreciation and amortization and suggests Stonepeak got a discount of about 20% compared to the market. Airlines and aircraft lessors on average are trading at a multiple of seven times earnings. The median enterprise value/EBITDA multiple for transportation and logistics deals in the first quarter was about 11x, according to investment bank R.L. Hulett.
“We view that as a reasonable valuation based on what the market has given the company for the past 10 years,” said Frank Galanti, a research analyst at Stifel, in a client note.
The transaction is expected to close in the first half of 2025, subject to regulatory approval. ATSG’s shares will be delisted from the NASDAQ exchange.
Michael Ciarmoli, a transportation analyst at Truist, said in a research report that the 20% discount is justified “given recent operating performance, pilot union contract unknowns, and increased exposure to older freighter platforms compared to newer passenger variant aircraft.”
Under terms of the agreement, ATSG may solicit proposals from third parties for a period of 35 days through Dec. 8, and in certain cases for up to 50 days, to see if it can get a better offer. And it can respond to unsolicited proposals until shareholder approval is granted. ATSG has the right to terminate the buyout by Stonepeak if it chooses another deal, but would have to pay a termination fee.
“The agreement with Stonepeak will deliver immediate and certain cash value to ATSG’s shareholders at a substantial premium to recent market prices. … Following the board’s careful evaluation of the transaction, we are confident it is the best path forward and maximizes value for ATSG’s shareholders, while also benefiting our employees, customers, partners, communities and other stakeholders,” said executive chairman Joe Hete.
Galanti said it is unlikely another bidder will emerge, but didn’t rule out another financial firm showing interest in part because the company could take on more debt for leverage purposes as a private entity. A competitor likely would not buy ATSG because of the significant Amazon ownership stake, which could still increase through unexercised warrants, while Amazon wouldn’t buy the company because of its exposure to unionized labor.
Amazon owns 19.5% of ATSG and would no longer have a stake once the Stonepeak deal closes.
The union representing pilots at subsidiary Air Transport International has been locked in contract negotiations with ATSG for more than four years. Earlier this year it asked federal mediators to declare an impasse, one of several necessary steps before pilots would be allowed to go on strike. Workers at other ATSG airlines are represented by different unions.
ATSG, which went public more than 20 years ago in a spin off from the former Airborne Express, leases Boeing 767 converted freighter aircraft and a handful of smaller Airbus A321s. Soon it will also begin leasing A330-300 freighters. It also operates two cargo airlines under an asset-light model and a charter passenger airline. Major customers include Amazon, DHL Express and the U.S. Department of Defense.
E-commerce relies on freighter aircraft
Demand for medium and large-size cargo aircraft is increasing as air cargo volumes rebound from a prolonged downturn following the recession, heavily influenced by rising e-commerce orders from popular Chinese selling platforms. Air cargo volumes are up about 12% year over year since December, according to multiple freight data providers. E-commerce players in Asia are booking so much space on commercial aircraft, or chartering entire flights, that there has been limited space for other shippers in recent months. Airlines and logistics providers are also seeing strong shipping activity for perishables, fashion and automotive products.
At the same time, the supply of aircraft capacity for cargo is constrained and there are questions whether production will be able to keep up with estimated annual volume growth of 4%. Experts say many aging widebody freighters are quickly approaching retirement age, there is reduced space for cargo on passenger flights as travelers check more baggage and airlines are reassigning many aircraft to leisure destinations where there isn’t freight demand. Manufacturers are facing production slowdowns due supply chain, labor and quality problems, which in turn is forcing passenger airlines to hold onto aircraft longer, reducing the amount of feedstock available for cargo conversions.
“ATSG plays a fundamental role in enabling the growth of e-commerce globally in a world that continues to shift away from brick-and-mortar shopping,” said James Wyper, senior managing director and head of transportation and logistics at Stonepeak in a press release. “ATSG’s deep relationships with some of the world’s largest e-commerce companies and integrators, combined with the scale and capacity of their fleet and relentless focus on safety and on-time performance, gives us confidence in the company’s trajectory as a sector leader.”
Based in Wilmington, Ohio, ATSG owns 134 aircraft in revenue service, including 20 passenger planes. The total includes straight leases to other airlines, leased aircraft bundled with a service agreement that includes crews, maintenance and insurance, and aircraft provided by customers like Amazon.
“In Stonepeak, we have found a partner that recognizes the power of our Lease+Plus strategy to provide comprehensive aircraft leasing and operating solutions to our customers. With Stonepeak’s investment and extensive expertise in transportation and logistics and asset leasing, ATSG will be well positioned to further expand its global presence in the air cargo leasing market and enhance its service offerings to customers,” said CEO Mike Berger.
ATSG has gone through a series of leadership changes since early November, when Rich Corrado was terminated for weak earnings and a deflated stock price during a pronounced downturn in freight markets. Investors punished ATSG’s stock in part for what were considered high capital expenditure plans for aircraft even during the market downturn.
Management and some analysts have argued that the company’s stock has been undervalued because of its hybrid model as a lessor and operator. Most of the risk as an airline is on customers that rent the fleet and crews and are responsible for finding cargo and paying for guaranteed minimum service levels. Going private will allow ATSG to take a more patient approach to capital and growth in the leasing sector characterized by steady cash flows from multi-year leases. And a private equity company will be more comfortable arbitraging debt, resulting in better returns on equity, said Galanti.
In the second quarter, revenues fell 7.7% to $488 million and ATSG recorded a $23 million pre-tax loss as its airlines flew fewer hours and some customers returned aircraft with expiring leases.
The deal is the second time in two years that investors have taken private a major U.S. cargo airline. A consortium led by Apollo Global Management in early 2023 acquired publicly traded Atlas Air for $5.2 billion, including $2.2 billion in debt.
Stonepeak, with about $56 billion under management, focuses investments on infrastructure and real estate. Its logistics portfolio includes chassis provider TRAC Intermodal, GeelongPort in Australia and temperature-controlled warehousing giant Lineage Logistics. In March, it completed the acquisition of container leasing company Textainer.
ATSG shares were trading at $21.98 Monday morning.
Goldman Sachs is advising ATSG on its sale and Evercore is Stonepeak’s financial advisor.
ATSG is scheduled to release earnings for the third quarter on Friday.
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