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GE Sinks as $30 Billion Sale of Jet Lessor Fails to Impress

(Bloomberg) — General Electric Co. tumbled as investors reacted coolly to a much-anticipated $30 billion deal to sell its jet-leasing business to rival AerCap Holdings NV.

The deal creates an aircraft-finance giant to be partly owned by GE and streamlines the manufacturer’s business model, but the announcement wasn’t accompanied by an upward revision in the company’s financial outlook that some on Wall Street had hoped to see.

“Expectations were that this would be a catalyst in terms of upside guidance,” said Nick Heymann, an analyst at William Blair, noting that GE under Culp has tended to raise guidance only after posting better-than-expected results.

The transaction is GE’s biggest move yet to break from its troubled recent past, with Chief Executive Officer Larry Culp’s charting a path to eliminate a storied financial unit that has gone from jewel in the crown to a burr in the saddle. Culp said the deal would “de-risk” GE, in part by reducing debt, yet S&P Global Ratings warned of financial threats that could prompt a downgrade.

The AerCap deal carries potential weaknesses. The tie-up gives rise to a behemoth lessor that in the short term 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 over time as air travel recovers.

“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 dropped 5.4{41490b4d0cf0dbc5ec3f65e11fff509c7d6ed2a53a838ebf7adf43f0908f07f3} to $13.25 at the close in New York for the biggest drop since September. The shares have more than doubled over the last six months, the best performance on the S&P industrial index, as Culp’s turnaround efforts regained traction after being upended by the pandemic.

AerCap fell 4.7{41490b4d0cf0dbc5ec3f65e11fff509c7d6ed2a53a838ebf7adf43f0908f07f3} to $53.39. The stock still traded above its level at the end of last week, before reports of the jet-leasing deal with GE Capital Aviation Services, or Gecas.

GE will take a $3 billion noncash charge on the agreement in the first quarter. The company 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.

Gordon Haskett analyst John Inch questioned the timing of the deal, with global air travel and the jetliner market still weak, and the $3 billion charge associated with it.

“As the number one aviation leasing company in the world (by number of aircraft), why isn’t this transaction instead generating a sizable (multi-billion dollar) gain?” he said in a note to clients.

GE 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.

“The stock had a significant run-up, then on top of that you have a transaction that the market has to kind of sort through, plus the wind down of GE Capital and the realization that this is actually neutral to net leverage,” said RBC Capital Markets analyst Deane Dray. “But they did reaffirm immediately to say that in the next couple of years they’ll be back to that 2.5x leverage target.”

Deal Structure

Under the deal, GE will receive $24 billion in cash plus 111.5 million shares, equivalent to a 46{41490b4d0cf0dbc5ec3f65e11fff509c7d6ed2a53a838ebf7adf43f0908f07f3} 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.”

The AerCap deal elevates the profile of Aengus Kelly, the lessor’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.

The leasing company 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{41490b4d0cf0dbc5ec3f65e11fff509c7d6ed2a53a838ebf7adf43f0908f07f3} 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,” 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 size of the deal could help boost global loan issuance which has suffered a 42{41490b4d0cf0dbc5ec3f65e11fff509c7d6ed2a53a838ebf7adf43f0908f07f3} slump from a year earlier.

Ratings Warning

Offloading 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.

GE’s credit rating may be cut by S&P, which said “debt leverage will be higher than previously expected due to the consolidation of GE Capital 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’s implications for planemakers are more nuanced than they might seem at first blush, according to Robert Stallard, analyst with Vertical Research Partners.

“Airbus and Boeing would much prefer to have a customer base that is well financed and stable, versus a plethora of small airlines and leasing customers that cannot survive through a downturn like 2020,” Stallard wrote in a note to clients.

“AerCap is also the aerospace version of a ‘sophisticated investor,’” Stallard said. “We don’t see it placing the speculative aircraft orders that some airline start-ups are prone to do.”

(Updates with analyst comment in third paragraph)

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