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Mon, Oct 29, 2007

Aero-Analysis: Is Columbia Being 'Sold' For Only $1.5 Million?

A Breakdown Of The PSA Suggests That Columbia Aircraft Is Being 'Sold' For $1.5 Million

Analysis and Opinion By ANN Contributor Rich Belzer

If you have been following the story of the Columbia Aircraft bankruptcy, you probably have seen numbers ranging from $14 to $24 million reported in the press. But let's take a look at the actual Purchase and Sale Agreement (PSA), recently executed by Cessna and Columbia Aircraft with an eye toward understanding what Cessna has offered to pay for the most important assets, the FAA Type Certificates for both the Columbia 350 and Columbia 400 and the tooling needed to manufacture these aircraft.

Here are the numbers:

  • The PSA states an approximate aggregate purchase price of $24.5 million.
  • $12.5 million to be paid for inventory. This includes raw materials, work-in-process, finished goods, demonstration materials, etc… This amount would be reduced dollar-for-dollar should a pre-closing inventory reveal a lower actual value.
  • $2 million to be paid to Garmin, a portion of their pre-petition claims.
  • $4.3 million to cover aggregate claims for E-Vade (anti-ice) installations for which customers have already paid.
  • $4.2 million to cover aggregate potential warranty claims for existing customers.

Add it all up and you get $23 million leaving only $1.5 million for Columbia Aircraft's crown jewels: its Type Certificates and tooling.

In his interview with ANN last Thursday, Granger Whitelaw stated that ING Capital and Bridge Associates did an "abysmal" job in attempting to both turn Columbia Aircraft around and sell it. You can judge for yourselves if accolades should be awarded for obtaining $1.5 million for the company's most valuable assets or whether this amounts to a giveaway. But a judgment of "abysmal" deserves further analysis.

When Bridge Associates personnel, at the recommendation of ING Capital, arrived at Columbia Aircraft in mid-February, they were acting as consultants. Their initial contribution was to recommend that the company virtually cease manufacturing while it sold off the inventory which had accumulated in late 2006 as fallout from the June, 2006 hailstorm. The March reduction-in-force of roughly 350 people, a combination of lay-offs and furloughs, clearly improved the company's cash flow while, at the same time, causing consternation within the pilot community. In late March, Bridge asked Columbia Aircraft's board to convince Bing Lantis to "resign" and took operational control of the company; Carl Young assumed the position of Chief Reorganization Officer and Michael Culver reigned as Chief Operating Officer. Almost 6 months to the day after Bridge took control, bankruptcy was filed along with the Letter of Intent from Cessna to purchase assets.

Why was Mr. Lantis, the highly respected and industry-knowledgeable CEO, ejected from the company? It was clear that Bridge felt that their "turnaround plan" could not be executed with Mr. Lantis at the helm. So was the goal all along to arrive at a bankruptcy or did something go wrong during the 6 months of Bridge control?

By late May, Columbia Aircraft had gone through most of their aircraft inventory and began recalling manufacturing employees. From this point on, the company had to stand on its own two feet and, according to a July interview with a company executive, the breakeven point had now been lowered from 5 aircraft per week to only 3 ½ per week. This translates to roughly 15 aircraft per month, not just a manufacturing rate but a necessary goal for obtaining orders as well. For the company's sales organization, this required roughly a 10% increase over 2006 order production.

So what actions did the Bridge executive team take to obtain the increase in orders:

  • In late spring, Columbia Aircraft ceased its nearly-complete efforts to certify its aircraft in Europe (with EASA).
  • In early July, the company withdrew its support for the E-Vade anti-ice system, encouraging its customers and prospects to move to TKS for which AS&T had recently obtained an STC. With the Columbia 400 SLX (fully loaded) priced $60,000 above the equivalently-equipped Cirrus SR22 Turbo GTS, this action removed a principal differentiator between the two aircraft.
  • The actions above caused Columbia Aircraft's European representatives to terminate their efforts to obtain orders. This occurred at a time when most GA companies were heavily pursuing European business due to the low value of the dollar versus the Euro and Pound Sterling.
  • Pricing for the Columbia 400 was never adjusted downward to keep it competitive with the SR22 Turbo. In 2006, the Columbia 400 generated 80% of the company's orders, 20% going to the Columbia 350 which had been under competitive pressure from the SR22 for its entire history.

Given the above issues, industry observers were predicting by July that order production would be below 2006 levels and, absent cash from Malaysia or a sale of the company, Columbia Aircraft would fail by fall, 2007. But did the Bridge Associates executives understand this and what were they telling ING Capital, the company responsible for selling the company?

Phil Comerford, Managing Director of ING Capital, testified under oath at the bankruptcy hearing on October 22, that he had never provided a valuation number to any prospective buyer. Yet somehow, multiple companies believe they were told in June and July that Columbia Aircraft was worth in the range of $80 to $100 million. Whatever Mr. Comerford was saying to prospective buyers, ING's results speak for themselves: 16 companies signed non-disclosure agreements (NDA's) and 5 visited the company's factory. None chose to pursue due diligence or made an offer to purchase.

Only Granger Whitelaw (pictured below) came forward with an offer that would keep the company out of bankruptcy but his approach to fund the company and pursue due diligence over a period of months was rejected. This, finally, brings us back to Mr. Whitelaw's characterization of the efforts of Bridge Associates and ING Capital as abysmal. Off the mark? I suspect that Columbia Aircraft's many creditors might choose a more colorful adjective.

But don't discount the abilities of Bridge Associates completely; their 60-day initial agreement was extended to more than 7 months and they have, and continue to be, nicely compensated for their efforts. To my knowledge, Bridge is not among the creditors who are suffering from the end result of their efforts.

The only good news for the creditors is that the $1.5 million bid for Columbia Aircraft's Type Certificates and tooling is likely to go significantly higher. Cessna (Textron), Cirrus Design (Arcapita) and Park Electrochemical are likely to spur a lively auction on November 27. And don't discount Granger Whitelaw's ability to hang in there as well.



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