General Electric Co. is approaching a more than $ 30 billion deal to combine its aircraft leasing business with AerCap AER of Ireland. 1.62%
Holdings NV, according to people familiar with the matter, is the latest in a series of moves by the industrial conglomerate to restructure its once-sprawling operations.
Although details of how the deal would be structured could not be known, it is expected to be valued at more than $ 30 billion, some of the people said. An announcement is expected Monday, assuming the talks don’t fall apart.
The GE GE 0.29%
The unit, known as GE Capital Aviation Services, or Gecas, is the remaining majority of GE Capital, a sprawling lending operation that rivaled the largest U.S. banks but nearly sank the company during the financial crisis. 2008. GE already took a big step back from the lending business in 2015 when it said it would exit most of GE Capital, and a deal for Gecas would represent another big step in that direction.
It would also represent another significant move by GE CEO Larry Culp to set the course for a company that has been hit in recent years by sour prospects for some of its major lines of business and a structure that has fallen out of favor with investors.
With over 1,600 aircraft owned or ordered, Gecas is one of the world’s largest aircraft leasing companies, along with Los Angeles-based AerCap and Air Lease Corp., leasing passenger jets made by Boeing Co. and Airbus SE, as well as regional aircraft. and cargo planes to clients ranging from flagship airlines to startups. Gecas had $ 35,860 million in assets as of December 31.
AerCap has a market value of $ 6.5 billion and an enterprise value (adjusted for debt and cash) of approximately $ 34 billion, according to S&P Capital IQ, and about 1,400 aircraft owned or ordered. The company is experienced in making deals, paying around $ 7.6 billion in 2014 to buy International Lease Finance Corp. AerCap’s revenue last year was around $ 4.4 billion, down from $ 5. billion in previous years.
The aviation business has been hit hard by the Covid-19 pandemic, which has caused a sharp drop in global travel and led to airlines landing on planes. Some airlines have tried to defer lease payments or the purchase of new aircraft. Gecas had an operating loss of $ 786 million on revenue of $ 3.95 billion in 2020. GE took an approximately $ 500 million reduction in the value of its aircraft portfolio in the fourth quarter.
The combination of the companies could offer cost-cutting opportunities and help the new entity weather the recession.
The separation of Gecas could help GE in its efforts to shore up its balance sheet and improve cash flows. Despite a recent surge, GE’s stock price remains below where it was before major problems emerged in the company’s energy and finance units in recent years.
The Boston company has a market value of around $ 119 billion after shares more than doubled in the past six months as they posted better results. Still, the stock has dropped about three-quarters from its peak of just over 20 years ago.
Culp became the first CEO outside of GE in late 2018 after the company was forced to cut its dividends and sell businesses. Former Danaher Corp.
Chief has tried to further simplify GE’s powerful conglomerate structure, like other industrial giants like Siemens AG and Honeywell International Inc.
have done in recent years.
Activist investor Trian Fund Management LP, who has held a significant position with the company since 2015 and sits on its board of directors, has supported these changes.
Early in his tenure, Culp said he had no plans to sell Gecas, a move his predecessor, John Flannery, had considered after the unit attracted interest from private equity firms moving forward in the leasing business.
Mr. Culp has sought to level cash flows and refocus on core areas. The operations it has spun off include the company’s biotech business, which was bought by Danaher in a $ 21 billion deal that closed last year. GE also sold its iconic light bulb business in a much smaller deal last year, previously saying it was ditching its majority stake in oilfield services company Baker Hughes Co.
GE has reduced overhead and jobs at its jet engine unit while streamlining its energy business. However, the pandemic continues to put pressure on the jet engine business, GE’s largest division.
The company also makes healthcare machines and power generation equipment, and the rest of GE Capital makes loans to help customers purchase its machines and also contains legacy insurance assets.
AerCap is based in Ireland and Gecas is also based there. The aircraft leasing industry has long had a significant presence in Ireland due to the country’s favorable tax regime and the importance of Guinness Peat Aviation in the development of the sector. (An agreement between GE and AerCap would bring together two companies that bought their main assets from GPA.) However, the industry has become more competitive as Chinese companies have gained market share, and the combination could help the new group stem that tide.
Shares of aircraft leasing companies plummeted along with much of the market in the early days of the pandemic as demand from major airlines, which lease planes to avoid the costs of owning them, evaporated. But many of the major lessors’ stocks have made up lost ground and something else in the months since, as closures ease and travel prospects improve.
AerCap Chief Executive Officer Aengus Kelly said in his fourth-quarter earnings call this month that he expects airlines to shift more toward aircraft leasing as they rebuild their balance sheets, in what would be a boon to the company and their peers.
“Their appetite for deploying large amounts of scarce capital into aircraft purchases will remain silent for some time,” he said. “The priority will be to pay the debt or government subsidies.”
—Thomas Gryta contributed to this article.
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