Deutsche Lufthansa AG (LHA)’s catering unit said an initial public offering of the world’s biggest provider of inflight meals is an option after cost cuts and economic growth started to spur earnings at the subsidiary.
A stock-exchange listing would require more time to prepare, said Walter Gehl, the chief executive officer of LSG Lufthansa Service Holding. Christoph Meier, a spokesman for the parent airline, said Lufthansa is not actively pursuing the option for the business, which provides catering services for more than 300 carriers worldwide.
LSG Lufthansa Service Holding has cut costs and closed sites in an effort that resulted in five straight years of earnings growth for the business that may be valued at about 1 billion euros ($1.4 billion). The unit still aims to contribute 160 million euros in operating profit in 2015, even after Lufthansa on June 11 cut the group target to 2 billion euros from 2.65 billion euros.
Operating profit at the unit last year at 105 million euros was the highest since 2002 at a margin twice that of the main airline unit. While Lufthansa ruled out a sale in May last year, new Chief Executive Officer Carsten Spohr is conducting a strategy review and Gulf carrier Emirates has expressed interest in a deal.
“I think it is great if someone wants to buy us,” Gehl said of comments from the head of Emirates Group’s Dnata ground-handling operation. “It means someone finds us attractive and appreciates what we do. Our management is stable and courageous enough to cope with any shareholder.”
Lufthansa rose as much as 46 cents, or 2.9 percent, to 16.27 euros after Gehl’s comments, reversing a drop of as much as 0.5 percent in earlier trading. The stock, which traded at 16.19 euros at 2:20 p.m. in Fankfurt, has gained 4 percent this year, less than the Bloomberg World Airlines Index, which is up 12 percent in the period.
LSG delivers 532 million meals a year to airlines at 213 airports in 54 countries. Companies within the division had total sales of 2.5 billion euros last year. An IPO option would resurrect plans for a listing of the unit from more than a decade ago.
LSG may be worth about 1 billion euros, calculated as six times its 2013 earnings before interest, tax, depreciation and amortization -- a typical multiple for the industry, according to the executive -- which amounted to 170 million euros.
Spohr, who took over as CEO on May 1, will outline his strategy for Europe’s second-largest airline on July 10. The catering unit will be headed by Erdmann Rauer, its sales chief, from Oct. 1, when Gehl steps down after a decade at the helm.
While Lufthansa last year officially dropped plans to offload LSG, Dnata President Gary Chapman said last month he’d be interested in the business if Spohr changes his mind.
The Lufthansa business already has ties to Dnata, forming a joint venture with 3,600 employees and 340 million euros in sales to serve the U.K. market in 2012. The pair also jointly own a smaller catering business in Bulgaria’s capital Sofia.
“If we grow in Africa, Asia and Russia we will be able to lift our margins,” Gehl said in Neu-Isenburg near Frankfurt, where LSG is based, adding that catering deals with Asian carriers can be especially lucrative since their passengers “like to eat three warm meals a day, and they expect that on an aircraft too.”
While there have been attempts to consolidate the sector, such moves may be hindered by the top two’s control over more than half of world sales, Gehl said.
Germany, LSG’s second-biggest operation in terms of employees after the U.S., will need two years to reach the desired level of profitability, though the majority of restructuring has been done, the executive said.
“My successor has his primary strength in marketing and sales and naturally is thinking growth,” he said.
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