(Bloomberg) — General Electric Co. sank after agreeing to sell its jet-leasing business to rival AerCap Holdings NV for more than $30 billion, a deal that creates an aircraft-finance giant in a market still reeling from the coronavirus pandemic.
The transaction also signals the end of GE Capital, the once-mighty finance unit, whose remnants will be folded into the broader company. Chief Executive Officer Larry Culp said the deal would “de-risk” GE, in part by reducing debt, yet S&P Global Ratings warned of a downgrade because of increased leverage. GE will take a $3 billion noncash charge on the deal in the first quarter.
The tie-up gives rise to a behemoth lessor that will have to contend with a deep aviation slump that has prompted airlines to cancel jet orders, delay deliveries and defer lease payments. The lingering pain for aircraft financiers raises doubts about whether bigger is better, even as AerCap said the deal would position it to profit from an expected recovery in air travel.
“Even if an AerCap-GECAS combination improves the cost of debt, which is essential to be more competitive, aircraft leasing will remain highly challenged, with companies from Asia gaining clout due to a lower cost of capital and local influence,” Bloomberg Intelligence analysts George Ferguson and Francois Duflot said in a report. “Lessors around the globe are at risk of excess fleets post-pandemic.”
GE tumbled 5.5% to $13.23 at 11:45 a.m. in New York after sliding as much as 7.7% for the biggest intraday drop in five months. AerCap dropped 6% to $52.63.
Separately, GE maintained its 2021 financial forecast, predicting adjusted earnings of 15 to 25 cents a share. That trailed the 26-cent average of analyst estimates compiled by Bloomberg.
In addition, the company said its board would recommend a reverse stock split at a ratio of 1-for-8, which Culp said would reduce the number of outstanding shares to a level more in line with companies that have comparable market values.
Under the deal with AerCap, GE will receive $24 billion in cash plus 111.5 million shares, equivalent to a 46% equity stake in the combined entity, according to a statement Wednesday. GE will get an additional $1 billion from AerCap in either cash or debt when the transaction closes.
“This marks the transformation of GE into a far more focused, simpler and stronger company,” Culp said in an interview. “This is going to give us an opportunity to focus fully on our four industrial businesses.”
Acquirer’s View
AerCap said the transaction would enable it to profit from an industry rebound as expanding vaccination campaigns prompt people to fly again after last year’s unprecedented drop in travel demand. With the acquisition, AerCap would own and manage a portfolio of more than 2,000 planes, about 60% of which are narrow-body aircraft. The company would have an order book of about 500 latest-generation jets.
“It is clear that we have bought the right business at the right time for the right price,” AerCap CEO Aengus Kelly said on a conference call. “And critically, we are teaming up with the right partners.”
AerCap’s $24 billion committed financing from Citigroup Inc. and Goldman Sachs Group Inc. ranks as the second-largest loan globally so far this year, after Verizon Communications Inc’s $25 billion obtained last month, according to data compiled by Bloomberg. The large-sized deal could help boost global loan issuance which has suffered a 42% slump year-on-year.
Offloading GE Capital Aviation Services, or Gecas, is the splashiest deal yet for Culp, who took the helm in 2018 with a mandate to rescue the U.S. industrial icon. He has shed assets to slim down the unwieldy conglomerate, giving the stock a boost after a corporate meltdown that wiped out hundreds of billions of dollars in market value.
The Boston-based company plans to use proceeds of the sale to cut debt by about $30 billion, for an expected total reduction of more than $70 billion since the end of 2018. The deal is expected to close in nine to twelve months, and Gecas’s more than 400 employees will transfer to AerCap.
Ratings Warning
GE may be cut by S&P due to the consolidation of GE Capital’s financials. The ratings company said its outlook on GE will be based on the company’s operating performance and expectations for further debt reduction.
Last year, GE completed the sale of its bio-pharmaceutical business to Culp’s former employer, Danaher Corp., for $21.4 billion. In 2019, the company agreed to sell an aircraft-financing business for $3.6 billion to Apollo Global Management and Athene Holding Ltd. as the ailing manufacturer slimmed down its once-vast lending arm.
The expanded AerCap-Gecas lessor will gain negotiating leverage with manufacturers like Boeing Co. and Airbus SE, and is likely to get antitrust scrutiny from authorities and stakeholders. The new company also would be able to focus on the strongest airline customers during the pandemic recovery, when many will rely on lessors for financing flexibility.
The deal elevates the profile of Kelly, AerCap’s hard-charging CEO. He emerged on the global stage in 2014 with AerCap’s $7.6 billion acquisition of leasing pioneer ILFC from American International Group.
AerCap, based in Dublin and listed on the New York Stock Exchange, had a market value of $6.6 billion on March 5, before reports of the GE talks.
(Updates shares in fifth paragraph)
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