AerCap has confirmed that it has entered into a definitive agreement with General Electric to acquire 100% of GE Capital Aviation Services (GECAS) for a total value of approximately $30bn.
Under the terms of deal, AerCap will acquire $34bn of GECAS net assets, which includes its aircraft fleet and platform, engine leasing business and Milestone helicopter leasing company. AerCap will also take over GECAS’ orderbook and more than 400 GECAS employees upon completion of the transaction, which is expected to be in the fourth quarter of 2021.
AerCap will pay GE $24bn in cash, $1bn in AerCap notes and/or cash upon closing, and 111.5 million ordinary shares, which is equivalent to approximately 46% ownership of the combined company with a market value of approximately $6 billion as of March 9, 2021. For the first quarter of 2021, in connection with signing the transaction agreement, GE will record an approximate $3bn non-cash charge and report GECAS as a discontinued operation.
With its 46% ownership of the new company, GE will be entitled to nominate two directors to the AerCap Board of Directors. The shares in the new company are subject to a staggered lockup period allowing GE to dispose of a third of its stake after nine months post close, a third after 12 months, and the entirety of its stake after 15 months. GE also will be subject to a customary standstill and other provisions.
The combined company will have over 2,000 owned and managed aircraft across 200 customers, over 900 owned and managed engines across 45 customers and over 300 owned helicopters across 40 customers. The combined aircraft fleet will have an average fleet age of 6.9 years and average remaining lease term of 7.1 years.
"We are excited about this opportunity to bring together two leaders in aviation leasing,” said Aengus Kelly, Chief Executive Officer of AerCap. “AerCap and GECAS both have industry-leading teams, attractive portfolios, diversified customer bases and order books of the most in-demand new technology assets. This combination will enhance our ability to provide innovative and attractive solutions for our customers and will strengthen our cash flows, earnings and profitability.”
Kelly describes GECAS as a “highly attractive business” and notes that this acquisition, as the recovery gathers pace will “create long-term value for our investors”.
On an investor call, Kelly highlighted the fact that AerCap has acquired four aircraft leasing platforms during downturns in the aviation economic cycle, each time at discount to book values. Debis Airfinance in 2005, Genesis in 2009, International Lease Finance Corporation (ILFC) in 2014, and now GECAS in 2021.
“We believe this is a great opportunity for AerCap and its investors. We are buying the right business, at the right time, for the right price, and teaming up with a great partner in General Electric,” Kelly told investors. “This transaction is now the fourth aircraft leasing business that AerCap has agreed to purchase at a discount to book value. And indeed we are the only company to have done so in the industry… Buying the right assets is important, doing so at the right price (is more so).”
Explaining further, Kelly shared with investors the fact that as a business GECAS has grown organically rather through acquisitions, which has heightened the value of the deal for AerCap. “When looking at the discount to book value that we are paying for GECAS, it is important to note that not all book values are created equal,” he said. “One of the key reasons we found this portfolio particularly attractive is that GECAS grew the business organically over time and achieved scale without overpriced M&A. For example, if we were buying an aircraft leasing company that had paid 1.3 times book value for another company as part of its evolution, then the book equity of that aircraft leasing business is already at a premium to cost. GECAS has not done this, and we are purchasing it at a discount. This will result in lower starting book values and speaks to the disciplined decision making exhibited by the GECAS leadership team. It is clear that we have bought the right business, at the right time, for the right price and critically, we are teaming up with the right partners.”
The acquisition package is similar to the deal AerCap struck with AIG for the purchase of ILFC. Under the terms of that agreement, AIG received $3bn in cash and 97,560,976 AerCap shares valued at $26bn, and 46% ownership of the combined company with shares subject to a similar lockup schedule as the GECAS transaction. This arrangement enabled AIG to capitalise on the upside of the deal and sold its shares in two offerings for more than $4bn a year later, exiting its full stake in August 2015. Speaking to investors during its own call, GE Chairman and CEO, H. Lawrence Culp Jr., noted: “Our combined company will benefit from a stronger financial profile with a broader revenue base, stronger cash flows and greater customer diversification. This will provide balance sheet strength and flexibility, enabling the company to invest in growth while serving customers through industry cycles.”
GE CFO Carolina Dybeck Happe added that the upside of the deal has enabled GE to receive substantial cash while retaining a larger stake in a stronger combined company that gives GE “a strong upside potential with flexibility to monetise as the aviation industry recovers”.
Both Kelly and Culp praised their respective teams during the process. Culp said that AerCap was the “right partner” for its “exceptional GECAS team”.
Culp said: “Combining these complementary franchises will deliver strategic and financial value for both companies and their stakeholders. Together we're creating an industry-leading aviation lessor with expertise, scale and reach to better serve customers around the world, while GE gains both cash and upside in the stronger combined company as the aviation industry recovers."
Citi and Goldman Sachs have provided AerCap with $24 billion of committed financing for the transaction. Peter Junas, chief financial officer of AerCap confirmed during the investor call that this bridge financing will be refinanced prior to closing by the issuance primarily of unsecured bonds, of varying tenors spread out of many years, in US dollars and Euros, as well as a small amount of secured debt and some hybrid debt. AerCap’s most recent $1bn five year notes priced at 1.75% - the lowest coupon ever for the leasing company. Junas said that the deal demonstrates the “tremendous support” for AerCap in the capital markets and bond investor confidence in the leasing industry during the pandemic. As a result he expects that the recovery in air travel demand and the GECAS transaction will make any future issuances very attractive and as such is “confident in the [takeout] financing”.
AerCap expects to maintain its current investment grade credit ratings with S&P, Moody's and Fitch and even enhance it once the deal has closed. The lessor notes that the transaction will “enhance many of AerCap's key credit metrics, as the combined company will have stronger cash flows and a more diversified revenue and customer base”.
The combined company is expected to reach achieve revenues of $7bn a year and $5bn in operating cash flow.
The adjusted debt-to-equity ratio of the combined company is expected to be 3.0x at closing of the transaction. AerCap says that it will maintain its target adjusted debt-to-equity ratio of 2.7x and “expects to return to this level rapidly”.
The limited overlap of the two leasing companies’ customer bases is noted as a major strategic benefit, which will enabled AerCap to expand its breadth and reach. Both companies are active aircraft traders in the secondary market – having sold on average over $5 billion of assets per year – and the combined portfolio will not consist of 60% narrowbody aircraft, with new technology aircraft representing approximately 56% of the combined in-service fleet. With the orderbook of 493 new tech aircraft, that ratio will increase to 75% in 2024.
Commenting on the engine leasing business, AerCap notes that it adds revenue diversification and a greater ability to provide “innovative solutions to our airline customers”. On the investor call, Kelly elaborated that the business was a “premier engine leasing business” with a high quality portfolio as well as GECAS’s joint venture engine leasing business, Shannon Engine Support (SES). The vast majority of the engine portfolio are CFM 56 and CFM leap engines produced by GE and CFM. Although the business is expected to be around 5% of assets, Kelly says that it “adds much more than that in terms of relationships, expertise, and product offering”.
Commenting on the additional of the Milestone helicopter leasing business, Kelly noted the reliance of the busines on the fortunes of the oil and gas industry, which he says is beginning to recover. “We are acquiring more than 300 helicopters – the youngest and largest fleet in the industry. This segment has historically had a strong reliance on the oil and gas sector, which has been under pressure, but with oil prices gathering momentum, the macro outlook for oil and gas is more positive than it has been for quite some time.” Kelly also notes that he is excited by the acquisition of Milestone since the supply side of the helicopter business has contracted significantly and the team has turned around the business significantly, which when the attractive purchase price is taken into account, suggests “improved lease yields and returns going forward”.
The combined company will retain the name AerCap, and GECAS will become a business of AerCap.
AerCap shareholders need to approve the deal, which will be at the AGM in May 2021.
Citi and Morgan Stanley acted as financial advisors to AerCap. PJT Partners LP, Goldman Sachs, and Evercore acted as financial advisors to GE.
Cravath, Swaine & Moore, NautaDutilh and McCann Fitzgerald acted as legal advisors to AerCap. Paul, Weiss, Rifkind, Wharton & Garrison, Clifford Chance, and A&L Goodbody acted as legal advisors to GE.
For GE, the benefits are obvious – cash to pay down debt, the ability to capitalise on the upside of the transaction with 46% ownership in the new company, and, perhaps most importantly, the ability to transform the company by the winding down of GECAS to refocus on the core business of aviation, power, energy and healthcare.
Post-close, GE plans to use the transaction proceeds to reduce debt by $30bn, which will bring its expected total reduction of more than $70bn since the end of 2018. GE will transition the remainder of GE Capital, including Energy Financial Services (EFS) and run-off insurance operations, to corporate—eliminating GE Capital as a segment and creating a simpler reporting and capital structure.
“We are on a positive trajectory in 2021 as momentum builds across our businesses and we transform to a more focused, simpler, and stronger industrial company,” says Culp. “I remain confident we will deliver value for GE’s shareholders, employees, customers, and communities for the long term. We are excited to shift more toward offense, investing in breakthrough technologies to serve the needs of our customers and the world—for more sustainable, reliable, and affordable energy; more integrated and personalized healthcare; and smarter and more efficient flight.”