Bloomberg
GE sinks because the $ 30 billion sale from the jet rental company fails to impress
(Bloomberg) – General Electric Co. sank 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 financial giant that will be partly owned by GE and simplifies the manufacturer’s business model, but the announcement was not accompanied by an upward revision of the company’s financial outlook that some on Wall Street expected to see. “Expectations were that this would be a catalyst in terms of positive guidance,” said Nick Heymann, an analyst at William Blair, noting that GE under Culp tended to elevate guidance only after posting better-than-expected results. The transaction is GE’s biggest move to date to break away from its troubled recent past, with CEO Larry Culp’s graphics on a path to eliminate a historic financial unit that has gone from crown jewel to a saddle burr. Culp said the deal would “lessen GE’s risk,” in part by reducing debt, but S&P Global Ratings warned of financial threats that could lead to a downgrade. The merger gives rise to a giant lessor that, in the short term, will have to deal with a deep aviation crisis that has prompted airlines to cancel jet orders, delay deliveries and postpone lease payments. Persistent pain for aircraft financiers raises doubts about whether bigger is better, even when AerCap said the business 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 in Asia gaining traction due to the lower cost of capital and local influence,” they said. Bloomberg Intelligence analysts George Ferguson and François Duflot in a report, “Landlords around the world are at risk of excess fleets after the pandemic.” GE fell 5.4% to $ 13.25 at the close in New York, the biggest drop since September. Shares have more than doubled in the past six months, the best performance on the S&P industrial index, with recovery efforts of Culp regaining strength after being overturned by the pandemic. AerCap fell 4.7% to $ 53.39. The stock was still trading above its level at the end of last week, before reports of the jet leasing agreement with GE Capital Aviation Services, or Gecas.GE, to charge a $ 3 billion non-cash charge on the deal in the first quarter. The company maintained its financial forecast for 2021, predicting adjusted earnings of 15 to 25 cents per share. behind the 26-cent average of analysts’ estimates compiled by Bloomberg, Gordon Haskett analyst John Inch questioned the timing of the deal, with global air travel and the jet plane market still weak, and the charge of $ 3 billion associated with it. A company aviation leasing in the world (by number of aircraft), why is this transaction not generating a considerable gain (billions of dollars)? ”He said in a note to customers. GE said its board would recommend a reverse stock split in the ratio of 1 to 8, which Culp said would reduce the number of shares outstanding to a level more aligned with companies that have comparable market values. “Stocks had a significant increase, so in addition, you have a transaction that the market has to classify, plus the reduction of GE Capital and the perception that this is really neutral in relation to net leverage,” said Deane Dray, analyst at RBC Capital Markets. “But they immediately reaffirmed it by saying that in the next two years they will be back to the 2.5x leverage target.” Business structure With the agreement, GE will receive $ 24 billion in cash plus 111.5 million shares, equivalent to 46% equity interest in the combined entity, according to a statement Wednesday. AerCap’s $ 1 billion in cash or debt when the deal closes. “This marks GE’s transformation into a much more focused, simpler and stronger company,” Culp said in an interview. “This will give us the opportunity to we focus entirely on our four industrial businesses. ” The AerCap deal raises the profile of Aengus Kelly, the lessor’s demanding CEO, who emerged on the global stage in 2014 with AerCap’s $ 7.6 billion acquisition of American International Group’s leasing pioneer ILFC. in Dublin and listed on the New York Stock Exchange, had a market value of $ 6.6 billion on March 5, before reports from GE speak. The leasing company said the transaction would allow it to profit from a recovery of the sector, as expanding vaccination campaigns make people fly again after the unprecedented drop in demand for travel. 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 next-generation jets. “It’s clear that we bought the right deal at the right time at the right price,” Kelly said in a conference call. “And, critically , we are associating with the right partners. ” AerCap’s $ 24 billion committed funding to Citigroup Inc. and Goldman Sachs Group Inc. is ranked the second largest global loan so far this year, after $ 25 billion from Verizon Communications Inc. billion obtained last month according to data compiled by Bloomberg. The size of the deal could help boost global loan issuance, which fell 42% from the previous year. Reviews WarningOffloading Gecas is the most impactful deal so far for Culp, who has taken over the command in 2018 with a mandate to rescue the US industrial icon, he divested assets to reduce the heavy conglomerate, giving a boost to stocks after a corporate collapse that wiped out hundreds of billions of dollars in market value. in Boston plans to use proceeds from 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 business and be closed in nine to twelve months, and the more than 400 Gecas employees will be transferred to AerCap.GE. The credit rating may be cut by S&P, which said that “the debt leverage will be greater than previously expected due to the consolidation of GE Capital’s finances.” The rating company said its outlook on GE will be based on the company’s operating performance and expectations of further debt reduction. Last year, GE completed the sale of its biopharmaceutical 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. while the struggling manufacturer reduced its once-vast lending arm. AerCap-Gecas’ expanded lessor will gain leverage in negotiating with manufacturers such as Boeing Co. and Airbus SE, and is likely to receive antitrust scrutiny from authorities and stakeholders. The new company would also be able to focus on customers of stronger airlines during the recovery from the pandemic, when many will depend on lessors for financing flexibility. The business implications for planners are more subtle than they might appear at first, according to Robert Stallard, an analyst at Vertical Research Partners. “Airbus and Boeing would prefer to have a well-financed and stable customer base, rather than a plethora of small airlines and leasing customers that cannot survive a recession like 2020,” Stallard wrote in a note to “AerCap it is also the aerospace version of a ‘sophisticated investor’, ”said Stallard. “We don’t see it making speculative aircraft orders that some start-ups are likely to place.” (Updates with analyst comments in the third paragraph) For more articles like this, visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source. © 2021 Bloomberg LP