Bigger May Indeed Be Better for GE's Latest Deal Partner -- Heard on the Street
18 March 2021 - 10:45PM
Dow Jones News
By Jon Sindreu
In the business of leasing planes to airlines, scale has always
played a leading role. The merger of the two biggest players is a
bet it will become even more important.
Investors are cheering AerCap's decision to buy General
Electric's jet-leasing unit. Shares in the Irish lessor are up 7%
since The Wall Street Journal reported talks on March 7, whereas
GE's have lost roughly 4%. If it clears antitrust hurdles, the
combined company will have about 2,000 planes, four times the next
biggest competitor.
The share-price reaction is partly about deal math. AerCap
agreed to pay $25 billion in cash and $6.7 billion in shares,
leaving GE with a 46% stake in the merged entity. The price implied
a 33% discount to the target's net economic book value, more than
the 27% discount to book at which AerCap's stock was trading before
the news.
GE is losing control of a strategic asset, but isn't necessarily
getting a bad price given the current pandemic-related
uncertainties around aircraft values. AerCap Chief Executive Aengus
Kelly is taking on some assets he probably doesn't want, such as a
big portfolio of regional planes and some older aircraft. He paid a
similar multiple in 2013 for California-based International Lease
Finance Corp., Davy Research analyst Ross Harvey points out.
Longer term, the deal's success will depend on whether Mr. Kelly
can bring something of the sparkle of a Silicon Valley platform to
his asset-heavy plane-leasing business.
Analysts usually highlight that a big lessor can extract greater
price concessions from Boeing and Airbus, and access cheaper
financing. However, AerCap is already so large that there isn't
much extra pricing power it can exert, and the combination
shouldn't improve its credit rating either.
Instead, Mr. Kelly's main rationale is to create a bigger
marketplace, where airlines returning jets to owners can be more
easily matched to airlines that need them, thus cutting the time
that the planes lie idle. Such gains bring lucrative "network
effects" more often associated with the tech sector.
The low-cost airline boom has given way to fleets that are
mostly made up of a single type of narrow-body plane. Even legacy
carriers have moved away from big expensive planes, even for
long-haul flights. The post-Covid era could strengthen this trend,
given that budget operators are expected to gain market share and
narrow-body jets will be able to fly much longer distances.
The result is a commoditization of aircraft, with an increasing
number of transactions involving the relatively low-value leasing
of jets belonging to either the Airbus A320 or the Boeing 737
families. This is a market where relationships and specialist
knowledge of each carrier and aircraft class matter less. It
instead favors big platforms geared toward higher-volume,
lower-margin deals and cutting costs. In the case of the AerCap
deal, these prized network effects should make it easier to
eliminate duplicate sales staff and some of the 30 offices the
combined company will inherit.
While small lessors may still be able to carve out market
niches, medium-size players seem condemned to merge with each other
if they are to compete with a behemoth AerCap. The parts of Wall
Street that scout for deal activity can rejoice: In all likelihood,
the race for scale among plane lessors is far from over.
Write to Jon Sindreu at jon.sindreu@wsj.com
(END) Dow Jones Newswires
March 18, 2021 07:30 ET (11:30 GMT)
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