Congrats to the Top Aces team

I thought it was appropriate to say publicly what i’ve already said to the founders privately: CONGRATS! The three founders at Top Aces (Dids, Dave and Paul) have accomplished what so many entrepreneurs dream of: starting up a business, raising seed capital (in this case from Larry Kelly, the very talented Ottawa lawyer), employing scores of people, and having someone offer you ~$75 million for the right to own it. And then actually closing the deal ($30 million in cash and 20 million shares in Discovery.)

The acquisition of Wellington Financial Fund II portfolio company Top Aces Inc. closed last night (see prior post “Top Aces agrees to be acquired by TSX-listed Discovery Air“, June 20-07). It is now a division of TSX-listed Discovery Air (DA.A), which is a holding company of a variety of firms providing specialty and rotary wing aircraft services to governments, mining and oil & gas concerns.

We provided $6.5 million of financing to Top Aces in 2005, joining the Ottawa team of RoyNat who had already put up a similar amount of money with the assistance of Investment de Quebec (to buy an initial four jets). Mark Wilk got the referral, and Jason and I pitched in to get it all done; I joined the board. Our funds were to be used to acquire and refit four Alpha Jets; Alpha’s are military jets without any weapons, designed primarily for use by the French and German Air Forces in the 80s.

Once the second batch of four planes were acquired from a U.S.-based broker, they had to be approved for “export” by the U.S. government. Being military tools and all it makes sense. Having the lenders registered as “arms dealers” by the U.S. State Department and Dept. of Homeland Secruity was unexpected, but if we wanted to take security on the airframes we had no choice. As one of my university roommates said jokingly: “I always knew you’d be an arms dealer.”

But in the specialty finance business, you do what the client needs done.

Things took off in August 2005 as the planes started to arrive in Canada. But by the winter, several planes were still required to operate in the U.S.A. while the paperwork was being processed. The guys adapted, and worked with the Canadian military to provide very crucial training for Canadian pilots operating out of U.S. air base in Florida, and the Canadian Navy steaming off San Diego.

By mid-2006, we were starting to see tremendous success on all levels. The operation was humming, the team was hiring the best and brightest (including the two most experienced CF-18 pilots in Canada; ie. with the highest flying hours), the business was profitable each and every month. With two additional aircraft purchased out of free cash flow, the founders had started a business and built a fleet of 10 Alpha jets on a budget of about $15 million of external financing. Remarkable.

As the operations continued, it became apparent to us that this was one of the greatest businesses that we’d ever see in Canada. Pick any metric: whether it be return on net assets, return on invested capital, operating margins…. The founders and their newly-assembled team had done an amazing job.

Of course, the team wasn’t entirely new to each other. The were just new to the private sector. Many of the staff at Top Aces are ex-military. Many of them have worked together at military bases in Cold Lake, Alberta and Bagotville, Quebec, for example. These people are highly skilled, and while the military isn’t a business – they do train people to get a job done. And very, very well.

When Co-CEO Dave Jennings first came to see us for funding in the spring of 2005, he took us through the basic presentation on what their standing offer contract was to provide for the military, what Alphas would do, what an ECM pod was, etc. Having worked in Ottawa for one of the Ministers of National Defence from 1989-91, I had the luxury of visiting over two dozen Canadian military bases in Canada and Germany. Flying on things like Labradors, Auroras, Kiowas, firing an FN-C1 on the CFB Wainwright guerilla training course, etc. You learn a great deal about the CF in those ministerial assistant jobs over a couple of years, 24×7 and all.

Most importantly, I got to see just how good the military are at what they do. Whatever the role, they are highly trained and very skilled. In the field, in the air, sitting at a desk. Any task. You want them on your team.

During the question and answer session Dave figured out that I might be a ringer when I asked if 416 squadron was still based at CFB Cold Lake (that’s one of the CF-18 squardrons). Not the kind of question he came across on Bay Street or St. James Street up until then. Everyone clicked on a personal level over lunch at an Italian Restaurant on Yonge Street, and it was clear then to the three of us that this could be a great company. They just needed the capital. And we had it.

With the closing of the acquisition, the rest is now history. Albeit a brief one.

Best of luck to the entire Top Aces team. Your accomplishment cannot be overstated. Discovery’s shareholders are lucky to have you all now working on their behalf. If you ever want to start another business, we’d be delighted to get a call.

MRM
(disclosure – Wellington Financial Fund II and certain LPs/managers owned shares in Top Aces, and are now shareholders in DA.A as this transaction was a cash & stock deal)