AerCap Confirms GE Talks to Create Giant of Aircraft Finance

(Bloomberg) -- AerCap Holdings NV confirmed it’s in talks with General Electric Co. about a combination that would create a giant of aircraft finance.

“The outcome of those discussions has yet to be determined and there can be no guarantee that an agreement will be reached,” AerCap said in a regulatory filing. The company said it wouldn’t comment further until discussions are concluded. GE declined to comment.

AerCap’s statement confirmed reports that the two companies, already the world’s two biggest lessors, are pursuing a pact to get even larger. While details of a potential deal remain unknown, an agreement would reshape a leasing market already roiled by the Covid-19 pandemic. For GE, a transaction could also curb the risks of a financial unit that nearly sank the company during the 2008 crisis and has remained a trouble spot in recent years.

Investors have been cautious about GE Capital and other financial risks beyond the manufacturer’s core operations, Bank of America Corp. analyst Andrew Obin said in a client note. “A smaller GE Capital would simplify GE‘s story.”

AerCap fell 2.5% to $55.10 at 9:46 a.m. Tuesday in New York. The stock surged 13% the day before, the most in almost four months, on reports of the talks. GE, which advanced Monday to the highest level since May 2018, was little changed Tuesday at $14.12.

‘Extreme Uncertainty’

An agreement may be reached as soon as this week, Bloomberg News reported earlier. The deal is expected to have a value of more than $30 billion, the Wall Street Journal said.

A sale of GE Capital Aviation Services could garner GE about $25 billion, Bloomberg Intelligence said in a report in 2019 -- before the pandemic gutted demand for flights. Last year, GE completed the sale of its biopharmaceutical business to Chief Executive Officer Larry Culp’s former employer, Danaher Corp., for $21.4 billion.

A deal would also mark a significant consolidation in the leasing sector at a time of “extreme uncertainty” for aviation, said John Strickland, who runs London-based airline advisory firm JLS Consulting.

The pandemic has pushed airlines around the world to cancel new jetliner orders, push back delivery dates and defer lease payments. As middlemen, aircraft leasing firms have suffered while also playing a critical financing role to keep deliveries flowing, often with sale-leaseback deals that hand cash to airlines with jet handovers.

A combination of Gecas and AerCap would have greater negotiating clout with manufacturers like Boeing Co. and Airbus SE, while being able to focus on the strongest airline customers during the recovery, when many will remain reliant on lessors for financing flexibility.

Regulatory Scrutiny

A tie-up would be likely to receive scrutiny from antitrust authorities, other regulators and business partners, given the weight of AerCap and Gecas in the sector.

“A potential combination of No. 1 and 2 in any market is usually reason enough for regulators to scrutinize a deal, but it doesn’t necessarily mean that regulators won’t approve it or that significant concessions will be required,” said Bloomberg Intelligence antitrust analyst Aitor Ortiz. “The fact that the airline industry is facing turbulence right now may be considered.”

Gecas had about $35.9 billion in assets at the end of last year, with about 1,650 aircraft owned, serviced or on order. AerCap, with assets of $42 billion, owned 939 aircraft and managed 105, according to a regulatory filing. The Dublin-based company, which is led by CEO Aengus Kelly, also had 286 planes on order, including jet models such as the Airbus A320neo and Boeing 737 Max.

Wall Street’s applause for the deal underscored enthusiasm for the turnaround effort that Culp began when he took the reins more than two years ago. Since then, he has shed assets, repaid debt, cut costs and pushed operational improvements in a bid to boost earnings and cash-generation at GE’s industrial units.

Yet some investors remain concerned about the risk that remnants of GE’s once-mighty finance arm -- especially the costly portfolio of long-term care insurance policies -- could be a persistent drain on performance, said Dan Babkes, a partner and senior research analyst at Pzena Investment Management. The firm held more than 89 million shares in GE as of Dec. 31, about 1% of the company’s outstanding shares.

An AerCap deal that eases those concerns could signal that Culp sees “a path to diminishing the risk in GE Capital on a more holistic basis,” he said. “That would a major positive for the stock.”

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