On February 28, Cirrus Industries, Inc. of Duluth, Minnesota announced that Cirrus had agreed to be acquired by China Aviation Industry General Aircraft Company, Ltd. (CAIGA) of Zhuhai, China. According to the announcement, the transaction is expected to close in mid-2011. The parties are seeking clearance from the Committee on Foreign Investment in the United States (CFIUS), as well as all relevant Chinese government approvals.
CAIGA states that it is a leading solutions provider in the general aviation industry of China. CAIGA controls four listed companies in China and its total 2010 revenue reached US $2.9 billion. Its main businesses include the R&D and manufacturing of light piston aircraft, turboprop aircraft, jets, amphibious aircraft as well as their parts and components. CAIGA also provides services including general aviation operations, pilot training and aviation clubs. Despite CAIGA’s statement that it has diversified shareholders, U.S. press reports describe it as China’s “state-owned general aviation manufacturer.”
Cirrus is owned by Arcapita Capital. Arcapita’s website suggests that Cirrus was acquired in August 2001. Arcapita has an office in Atlanta but is generally thought of as a Mid-East based private equity sponsor. Although the proposed deal is for a U.S. business, the transaction more correctly is a sale by one foreign owner to another. This is unlikely to affect the CFIUS review.
According to Twin Cities Business, the sale was motivated by Cirrus’ need for cash to fund the development of its first jet for the personal aircraft market. Cirrus had already raised over $60 million of investment capital to develop the new jet.
According to the Minneapolis Star Tribune, a former U.S. congressman is supporting the transaction and taking the initiative to dispel fears of the effect of foreign ownership.
This is not CAIGA’s first deal in the U.S. general aviation aircraft sector and, as a result, it likely is known or even well-known to CFIUS. Over the past few years, CAIGA has acquired the assets of distressed U.S. aviation companies, including Epic Aircraft of Bend, Oregon, and Teledyne Continental Motors of Mobile, Alabama. Its proposed purchase of Emivest Aerospace Corp. of San Antonio, Texas, now in Chapter 11, is pending.
These acquisitions have led to the inevitable speculation about the motivations of CAIGA. AVWebinsider, which styles itself as “Aviation’s Most Informative Blog,” provides three intriguing explanations:
"The first is the much-vaunted "master plan" theory in which the Chinese quest for world domination will be accomplished economically and it's coming after our most coveted assets. In that scenario each of these purchases fills a particular need for China to build a world-beating GA industry that will eventually snuff out all other forms of aviation life. There are some serious issues with that theory, however. For one, to take advantage of the purchases, China has some serious spending to do on runways, airways and all the other stuff that keep an aviation industry running. Why build airplanes when there are few places they can be used at home? True, the rules are relaxing and an embryonic GA industry exists but buying up foreign factories seems to me like putting the cart before the horse.
Another is that ancient Chinese wisdom doesn't apply here; that when it comes to airplanes, Chinese brains turn to mush just like those in the rest of the world and with all their money they just couldn't resist. Although it's widely assumed that because the Chinese are loaded they are inscrutable business people, our limited research reveals they've bought into their share of clinkers. Is Cirrus just the latest shiny object to provoke an impulse buy?
A third possibility is that this is the natural order of things. For all its wealth, China is an emerging economy and it flat out needs indigenous industries that it doesn't now have to catch up to the West, which may or may not be the goal. Something that seems likely is that the government of China has decided it needs a small airplane industry. It could build that industry on its own but when companies like Cirrus and the others are going for pennies on the dollar why would it bother?
Whatever the motivation, it is a positive sign that Chinese businesses are willing to make strategic acquisitions in the U.S., even where, as here, the business of Cirrus is regulated through the Federal Aviation Administration. Despite the difficulties faced by Huawei Technologies in purchasing non-regulated businesses, here is a Chinese manufacturer, perhaps even state-sponsored, that is aggregating a series of regulated business. CAIGA seems to believe that a straightforward approach in dealing with the CFIUS review process is allowing it to achieve its business aims. So far, it has succeeded.