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GE in talks to merge aircraft leasing unit with AerCap

The talks, first reported late Sunday in the Wall Street Journal, were confirmed Tuesday morning by AerCap (AER), the Ireland-based leasing giant — though the firm cautioned it could not guarantee a deal will be finalized. GE did not respond to a request for comment.

The Journal report had said Sunday that a deal was close, and that it would be worth more than $30 billion.

As recently as January 2019, GE (GE) CEO Larry Culp told investors during an earnings call that the company had “no plans to sell GECAS,” its aircraft leasing business. But the plunge in air travel caused by the Covid-19 pandemic proved to be a body blow to the business.

GECAS is now the majority of what’s left of the once massive GE Capital unit, accounting for nearly $4 billion of its $7.2 billion in revenue in 2020.

Just a few years ago, GE Capital was the company’s largest business unit. But the overall conglomerate has been in trouble for years, and GE has been busy reshaping and slimming down. GE sold off most of the real estate and other assets from GE Capital in 2015, followed by selling the appliance business in 2016 and its iconic light bulb business in 2020, among other offloading. And in 2018, GE cut its dividend to a penny a share to save cash.

The aircraft leasing business took a particular hit over the last year, as cash-strapped airlines around the world had trouble making payments to GECAS — with only 84{41490b4d0cf0dbc5ec3f65e11fff509c7d6ed2a53a838ebf7adf43f0908f07f3} of the unit’s invoices paid in 2020.

It had also been forced to write down the worth of the planes, which are now valued at $35 billion. The unit’s 2020 revenue was down nearly one fifth from the year prior, and it swung from a $1 billion profit in 2019 to a $786 million loss last year.

Meanwhile AerCap took a similar financial hit, also swinging from a $1 billion 2019 profit to a 2020 loss.

Shares of both GE and AerCap rose in Monday trading following the Wall Street Journal report about a deal being close. Shares of AerCap rose 13{41490b4d0cf0dbc5ec3f65e11fff509c7d6ed2a53a838ebf7adf43f0908f07f3} Monday to hit their highest point since February 2020, just before the pandemic started to affect air travel broadly.

GE shares rallied 4{41490b4d0cf0dbc5ec3f65e11fff509c7d6ed2a53a838ebf7adf43f0908f07f3} to have their highest close in nearly three years. Both shares were slightly lower in trading Tuesday after the deal was not announced before the US market open.

Analysts said Monday if there is a deal, it could be good for both companies.

“We would view such a combination as a ‘win-win’ for both parties, offering substantial synergies and market leading position for AerCap, and could represent a further simplification of GE’s portfolio and shrinkage of GE Capital, which investors would welcome,” said Julian Mitchell, a Barclays analyst who follows GE.

But others questioned GE’s timing of the sale. With the rollout of the Covid-19 vaccine raising hopes of a return to more frequent air travel later this year, it may be that GE is selling the unit at time when its value is near its low point, said John Inch, an analyst for Gordon Haskett Research Advisors.
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Meanwhile, the leasing business could be poised for a boost as airlines that would usually buy aircraft with cash in better times are now instead turning to financing options like leasing to add more planes.

“Airlines’ balance sheets look likely to remain strained for some time,” said Mitchell.

But there could be more pain ahead for the combined leasing company formed by this deal, especially if airlines are forced into bankruptcy by the ongoing crisis in international travel, according to Eric Bernardini, co-leader of the aerospace, defense and aviation practice at consulting firm AlixPartners.

“We think it will be more difficult in the next 12 to 18 months,” Bernardini said. “Our view is the market is not really improving right away. I think it will be a tough slog.”