Key Takeaways
- In December 2008, Kenn Ricci bought back Flight Options from Raytheon for $15 million cash and a $27 million personal guarantee after Raytheon lost $600 million running it into the ground.
- Ricci built the war chest for his counter-cyclical acquisitions by buying the fixed-base operator network Mercury Air Centers and selling it to Macquarie before credit markets seized up.
- In 2014, a simple equipment order for replacement Challenger jets turned into the outright takeover of Bombardier's struggling Flexjet division.
- When NetJets invoked secret contract covenants to block Bombardier from delivering Global jets to Ricci, he pivoted to Gulfstream in 2017 and eventually accumulated a fleet of 85 planes.
Buy when the seller is desperate to stop bleeding
Most buyers run away when an asset collapses. Big public corporations are terrible at running scrappy service businesses, and when they fail, they just want the embarrassment to disappear. That is where fortunes get made.
Raytheon bought control of Flight Options and spent years wrecking the business. They burned through cash, fought labor unions, and failed to integrate operations. Ricci watched from the sidelines while building cash elsewhere. He acquired Mercury Air Centers, expanded the fixed-base operator network, and sold it to Macquarie for hundreds of millions of dollars. When the subprime crash hit in late 2008, Raytheon had reached its breaking point.
“Raytheon's had enough fun with Flight Options,” Ricci recalled. “They've lost $600 million in the years they've owned it. The company's become unionized and it's a problem and it's going to crap.”
Raytheon wanted out at any price. While everyone else pulled back, Ricci stepped into the fire three months after Lehman Brothers failed.
He got the entire enterprise back for $15 million in cash and a $27 million personal guarantee. The seller had absorbed $600 million in losses so Ricci could buy the equity for pennies on the dollar.
Turn an equipment purchase into an acquisition
Acquisitions do not always start with a formal auction. Sometimes you discover a broken business simply by trying to be a good customer.
By 2014, Ricci needed replacement aircraft for Flight Options. He went to Bombardier to negotiate an order for Challenger jets. During the pricing discussions, it became obvious that Bombardier was struggling to support Flexjet, its in-house fractional jet division. The unit was burning capital and distracting Bombardier from its core manufacturing work. Ricci shifted the conversation from buying airframes to buying the entire operating subsidiary.
“I went to buy planes and they sold me Flexjet in 2014,” Ricci said. Instead of remaining just another charter operator buying planes at list price, he swallowed his competitor whole. He absorbed their customers, took over their infrastructure, and doubled his scale in a single transaction.
Turn an opponent's blocking tactic into an advantage
Whenever you take ground from incumbents, they use legal maneuvers to trip you up. The trick is refusing to waste years in court when you can change suppliers instead.
After buying Flexjet, Ricci tried to buy long-range Global business jets from Bombardier. NetJets found out. NetJets had previously purchased Globals under a contract with Bombardier that included restrictive covenants preventing Bombardier from selling those same jets to direct fractional competitors. Bombardier had signed the restriction and forgotten about it.
“Bombardier claims they were not aware that in the contract when they sold the Globals to NetJets, it prohibited them selling them to me,” Ricci said. “So, the message they had to convey was, 'We can't sell you the Globals.'”
Ricci did not sue. He took his capital down the road to General Dynamics. “That opened me the opportunity to go ahead and buy the Gulfstreams, which I did in 2017,” he said. “And now we still buy them today. We're the largest Gulfstream operator in the world. We have 85 of them.”
NetJets attempted to box Ricci out of a fleet type. Instead, they forced him to build a brand around Gulfstream jets, which carry higher prestige and stronger resale value.
What to Do With This
Find a large supplier or customer in your space whose non-core subsidiary is losing money, and request an operational audit under the guise of an enterprise contract. Offer to take the problem off their balance sheet before their next quarterly board meeting. Move quickly while the parent company cares more about dumping the headache than maximizing the purchase price.