In A Surprise, Oddsmakers Install Cirrus As Slight Favorite

Analysis and Opinion By ANN Contributor Rich Belzer, Former Columbia Sales VP

In a modest surprise, oddsmakers in Las Vegas have installed Cirrus and their backers from Arcapita as slight favorites to come out on top in the November 27 bankruptcy auction for the assets of Columbia Aircraft Manufacturing.

At 4-to-3, Cirrus has emerged as a slight favorite over Cessna -- originally considered a lock and the only committed bidder to date, having agreed to a Purchase and Sale Agreement (PSA) with Columbia Aircraft Manufacturing Corporation.

Here is what the oddsmakers have to say about the projected participants:

Cirrus/Arcapita (4:3) - Although many in the industry are skeptical over whether it makes sense for Cirrus to sell both SR22s and Columbias, there is no question that a pressurized Columbia 400 would make an ideal step-up aircraft for SR22 customers looking to move up to The Jet. The tricky problem for Cirrus would be how to sell five models through a direct sales organization that has spent years focused primarily on a single product, the SR22.

But what has elevated Cirrus to the role of favorite are the needs of Arcapita which by now should be ready for an exit strategy. The tricky question for Arcapita is whether there would be buyers for Cirrus at anywhere near what the company is currently worth if Cessna wins the auction and is selling Columbia's head-to-head against the SR22.

Although it is unclear as to the impact this might have on Cirrus' sales, the uncertainty would likely drive away potential buyers for some time to come. Unless Arcapita is willing to be very patient with their exit strategy, they are likely to be a very aggressive bidder in the upcoming auction.

Cessna/Textron (3:2) - The early favorite, Cessna's firm bid (PSA) to acquire Columbia Aircraft's assets and selected liabilities placed them in the early lead. However, Judge Elizabeth Perris has done much to level the playing field among the bidders leaving Cessna with a slight edge in the form of a break-up fee which would reimburse their due-diligence expenses (deemed to be roughly $450,000) should they fail to win the auction. In effect, another bidder would have to be more than $450,000 above a Cessna bid to be considered equal.

The big question in regard to Cessna is: Why are they so interested in Columbia Aircraft? Many industry observers would answer that the composite-makers -- Cirrus, Diamond and Columbia -- are eating their lunch in the piston business. Reality may surprise you, however. Looking at piston deliveries from 2000 to 2006 (source: GAMA), deliveries from the three composite-makers have increased 1,285% during that 6-year period, from 95 to 1,316 aircraft. What impact did this have on Cessna? Their delivery of piston aircraft has declined only 5.2% for the same period, down from 912 in 2000 to 865 in 2006. Far from eating Cessna's lunch, the composite-makers have, per Alan Klapmeier's mantra, increased the market for piston aircraft significantly -- 116% if you only consider these four manufacturers.

Given the fact that jets account for most of Cessna's revenue and earnings and that Cessna has its own composite aircraft in development (the NGP), can the acquisition of Columbia Aircraft's assets really be considered "strategic" for Cessna? Not really. On the other hand, the favorable groundswell from Cessna's dealers since the announcement of the company's letter-of-intent to purchase Columbia Aircraft's assets has not been lost on Cessna executives. Irrespective of strategic issues, Cessna would love to give their dealers the "gift" of some fast, composite aircraft to sell against the competition.

Park Electrochemical (5:2) - Clearly the dark horse in this competition, Park Electrochemical (NYSE:PKE) is a worldwide manufacturer of high-technology digital and RF/microwave printed circuit materials and advanced composite materials. Their primary markets are internet infrastructure, high-end computing and aerospace - specifically general aviation. For the past several years, the company's revenues have ranged from $200 to 257 million with net earnings in the 10% to 15% range. As of the end of their 2007 fiscal year (February, 2007) PKE's balance sheets showed a total of $209 million in cash and marketable securities.

PKE completed the information gathering portion of their due diligence last week and will now digest what they have learned and place their own value on Columbia Aircraft's assets. A key issue will be their assessment of whether, and by how much, manufacturing costs can be reduced, a critical issue for all bidders. Cessna and Cirrus, already dealing with some of Columbia Aircraft's vendors, are big buyers, knowledgeable in aircraft production and confident in their abilities to drive down cost; will the same hold true for PKE? Distribution costs (sales/marketing) in the general aviation market, well understood by both Cessna and Cirrus, will be uncharted waters for PKE.

PKE is a well-run, profitable company with an interest in diversification and the cash to make it happen. Will their analysis show that general aviation is a market worth entering and how high will they be prepared to go in the auction to make it a reality?

Granger Whitelaw and Associates (10:1) - The pity in all of this is that Granger Whitelaw, venture capitalist and CEO of the Rocket Racing League, has gone from being the only one to actually propose an approach to saving Columbia Aircraft as a company to the underdog in an auction against industry heavyweights. It is clear that Mr. Whitelaw has an interest in aviation and possessed significant motivation to take control of the company and turn it around which clearly would have been in the best interests of the company's long-suffering creditors.

Mr. Whitelaw's initial approach was to take management control of Columbia Aircraft along with an injection of capital; the goal was to begin a turnaround of the company while completing due diligence and valuation over a period of months. Now, however, he will have to rely on immediate due diligence to evaluate how high he and his backers will be prepared to go in the bidding. Will he have the motivation to go head-to-head with the favorites? Does he have sufficient backing to hang in there if the bidding numbers climb? The answers to these questions will only come clear in late November.

Side Bets

2% of Cash Proceeds to Bridge Associates Should Cessna Fail to Win (100:1) - In Columbia Aircraft's "Notice of Intent to Sell Property..." with the bankruptcy court, it is stated that Bridge Associates is seeking incentive compensation of 2% of the cash proceeds (currently $14 million per the Cessna PSA) should a purchaser other than Cessna win the auction. Will Judge Perris seriously consider this request which amounts to one more attempt to de-level the playing field? Should Bridge Associates, which already has been paid more than $1 million for their "efforts" in driving Columbia Aircraft into bankruptcy, receive additional compensation at the expense of the creditors? Is 100:1 long enough odds? Judge Perris will consider this request (among others) at a hearing scheduled to take place at 8:00 am on November 27, just ahead of the auction.

$30 million Over-Under (2:1) - The PSA agreed to by Cessna and Columbia Aircraft calls for cash compensation of $14 million ($12.5 million for inventory, $1.5 million for type certificates and tooling) and an aggregate purchase price of $24.5 million. Will the bidding drive the cash compensation to above $30 million, producing an aggregate sale price of over $40.5 million? Catch the auction on NFL Network. (What, you don't get the NFL Network?)

Place Yer Bets! (i.e. Participate in our poll.)

We are interested in learning your view of this sad but entertaining chapter in general aviation. In order to place your hypothetical "bet" on any of the above bidders or side bets, send an e-mail to the FMI link below, stating where you want to place your bet(s). Remember, this is only a hypothetical bet; you are risking no money nor will you receive any should your "horse" win. ANN will publish the results at least one week before the auction date.

FMI: Place Yer 'Bets' On Who Will Win The Columbia Auction