GE-Apollo Jet Deal Draws Analyst Skepticism

(Bloomberg) -- General Electric Co. gained more than 4.1 percent Monday after the possibility of a major divestment, even as Wall Street analysts expressed caution on the actual size of a potential deal and its impact on the cash-strapped company’s turnaround.

Bloomberg reported on Friday that Apollo Global Management was trying to find financing to buy GE’s jet-leasing unit, which could be valued at as much as $40 billion. JPMorgan says the unit could be worth closer to $30 billion, and was unlikely to be the “silver bullet” that some investors might be expecting it to be.

Barclays said that while such a deal could reduce some of the existential risks faced by the company, a lasting impact on the equity value would require more clarity regarding the liabilities at GE Capital.

Here is a round up of the analysts’ comments on the possible transaction.

JPMorgan, Stephen Tusa

“On de-leveraging, we remain skeptical on the company’s ability to harvest enough value out of its assets to reduce liabilities, both hard and soft.”

Says struggles to see support for a market value that is in line with the $40 billion of assets recorded on the balance sheet. “We think GECAS is worth closer to $30 billion, and we estimate a transaction at this level would wipe out all of GECS book value, while signaling a good degree of pressure, perhaps viewed as selling a committed order book to reduce heavy capex requirements that cannot be funded.”

“Value of this book is a major ‘to be decided’ that is unlikely to be the ‘silver bullet’ to the leverage issue at GECS that Bulls appear to expect.”

Rates GE neutral, price target $6.

Gordon Haskett, John Inch

“While a potential GECAS transaction could be worth $40 billion, this would only match the book value of GECAS reported assets of just over $40 billion. Consequently, it is not clear what debt would be assigned to this transaction and what proceeds would be realized.”

“If GE ends up selling GECAS to Apollo, it would be doing so as the valuations of primary competitors AerCap Holdings and Air Lease have collapsed. Consequently, this could reflect GE’s desperation to fire sale what it views as non-core (eg, Baker Hughes) regardless of valuation, based on an obvious need to raise cash as quickly as possible.”

“With core GE Capital losing up to $2 billion annually (excluding gains), removing GECAS’ ~$1.2 billion in earnings would prospectively exacerbate reported GE Capital losses and further drag GE’s overall difficult cash flow position.”

Rates underperform, price target $10.

Wolfe, Nigel Coe

“We have no knowledge of any transaction, but we believe this story to be credible.”
“We know that GE is selling non-core assets and GECAS is effectively a non-core asset that would materially shrink and de-lever the FinCo balance sheet.”

“The impact on GE stock can not be solely measured in terms of GECAS book value, but as another step in the balance sheet de-levering story.”

Rates GE an outperform, price target of $15.

Barclays, Julian Mitchell

Given how negative investor sentiment is toward GE Capital and the ongoing concerns around its cash and liquidity, the potential of a sale which could yield $8 billion to $10 billion in gross proceeds and should help reduce the existential question marks facing the company, the analyst wrote in a note.

For a lasting positive impact on the equity value, the investment community will also likely need more clarity regarding the liabilities at GE Capital. “Otherwise, the ‘narrative’ will remain impaired -– i.e. ‘good news is really bad news,’ in that GE has to sell assets because of a looming major cash claim at Capital.”

“We do not think there would be a material negative impact on GE Aviation’s future market share as a result of an exit of some or all of GECAS, as we think the technical performance of GE Aviation’s products is market-leading, and its industrial engine peers do not have large customer financing arms.”

Rates overweight, price target $12.

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