The sky’s the limit: simplifying complexity with the LSG Group’s carve-out from Lufthansa
Piloting a newly independent entity towards its full potential requires experience, entrepreneurship and resource. AURELIUS and the LSG Group are working together to help the Lufthansa carve-out to truly take-off.

The spin-off of global airline catering specialist LSG Group International (LSG) from Deutsche Lufthansa AG (Lufthansa) was characterised by complexity from day one. Its international reach made it attractive but also tricky for extricating, with 161 legal entities and in 49 countries meaning independence would require great care and experienced resource. The target had also been subject to a five-year-long sale process, during which a large part of its European activities were divested to competitor gategroup, just ahead of the pandemic, cutting the top-line of the business in half virtually overnight from >EUR 2bn to c. EUR 1bn.

Underscoring the resilience of the business and the management team leading it, the LSG Group started to recover in 2022, leading Lufthansa to eventually launch a formal process, targeted at leading global private equity firms, with highly competitive bids a testament to the asset’s appeal.

However the entangled complexity of the LSG Group meant it did not neatly fit the mould of a structured transaction. The business had a highly complicated legal structure, a significant amount of intercompany assets and liabilities which needed to be cleaned-up pre-transaction, and operational entanglements not only with the Seller but also with gategroup as a result of the prior transaction. Additionally, the ongoing recovery as airline traffic ramped back-up – at significantly different speeds across the world –   resulted in fluctuating EBITDA, driving challenges from a valuation and financing perspective.

The process clearly wasn’t for the faint-hearted, but AURELIUS’s approach stood out, with the experienced carve-out specialist deploying significant operational, legal and financial know-how and resources to diligently but pragmatically work through these issues. This approach and devising the best solution for the business and its ca. 20,000 full-time employees earned AURELIUS the trust to engage with Lufthansa on a bilateral basis, with agreement reached in March 2023 and closing taking place in October. Ultimately it meant the transaction was won on trust and good faith in an investor as true partner to Lufthansa and LSG.

“The LSG Group needs a steward with a lot resources as carve-outs are complex by nature, and this was incredibly global. AURELIUS has tremendous experience here so could bring real creativity and problem-solving to the situation, and it gave Lufthansa conviction we’d be a good custodian of a business with an 80-year heritage and which, having been a key business partner for decades, was very close to the vendor’s heart,” says Franz Woelfler, Partner Investment Advisory at AURELIUS.

It was as much about the hard yards of experience as it was about the people, a vitally important asset to the LSG Group.

“During due diligence we travelled a lot and toured many kitchens at airports as well as off-site, and this allowed us to look past the short-term impact of the pandemic and to see a fundamentally strong business. These people ultimately determine the quality of the food and thus how customers feel when they eat the food in flight – impacting the key KPI for airline customers, making them very relevant to the business”, explains Woelfer.

Preparing for take-off
The immediate plans are centred on executing the carve-out, supporting the business through the continuing recovery phase, and bringing shareholder focus to unlock its full potential.

“We will take a bottom-up approach to cast a lens on what is needed to improve, whether new processes, issues with customer interface, or a need for more investment. It’s not sexy work but we’re absolutely going to spend more time on a local level to get this right”, Janno Gröne, Operating Partner at AURELIUS explains.

Longer-term it’s about providing the business with an optimised overhead structure that caters to a highly global outlook but with local nuance. 

“We want to find a structure that provides the overhead required but is also as agile and efficient as possible so we can really deliver on the local level,” Rene Herzog, Operating Partner at AURELIUS says.

This will likely mean empowering the regional and local organisation. Lastly, AURELIUS will deploy the operational resources and know-how to support the management team around LSG Group CEO Erdmann Rauer to continue to execute LSG`s strategy to develop the full potential in the years to come. This will look not only to the core business airline catering business, but also address the high potential of Retail in Motion, one of the market leaders in onboard retail management, technology and supply chain management, as well as supporting the food commerce segment, which applies LSG Sky Chefs’s catering expertise to non-airline customers, such as 7-Eleven and Starbucks.

Why AURELIUS is the right pilot
“It’s ultimately their operational resources that make AURELIUS the best partner and we are confident they will give the LSG Group the full focus it deserves to thrive,” Erdmann Rauer, CEO of the LSG Group, enthuses. “With the backing of AURELIUS, we are convinced we can take our company to new heights.”

This resource and the experience behind it mean AURELIUS can drive the carve-out and extrication processes and allow LSG’s management to focus on pursuing an ambitious three-pillar growth strategy.

“We can also bring an entrepreneurship lens which allows us to adjust, deliver and stick around to execute on plans,” Janno Gröne, explains.

This is where AURELIUS’s operational background deviates from its private equity prowess: while other sponsors come in short-term with external consultants to draw up plans for change and leave teams to execute, AURELIUS takes on the long-term responsibility to see execution through.

“We will apply this lens to the micro-operations of the LSG Group in terms of looking at the operational complexity of local segments and tailoring the right strategy for it,” Rene Herzog explains.

AURELIUS are well placed to drive this owing to their significant resource and experience in deploying operational resources to different parts of businesses to help businesses achieve their full potential. And it may be that the LSG Group helps AURELIUS to fulfil its potential, too.