General Electric announced on Wednesday that it will sell its $ 30 billion jet leasing business to AerCap. This would create a massive lessor as the aviation industry grapples with the Covid-19 pandemic and GE looks to reduce its debt burden.
The deal would give GE a 46% stake in the combined company and generate approximately $ 24 billion in cash. GE Capital Aviation Services or Gecas is part of GE Capital that has been scaled back since the financial crisis. Upon completion of the transaction, which is expected to take GE nine to twelve months to complete, GE Capital will be integrated into the larger corporate structure, which will no longer be reported as a separate entity in financial reports.
GE said it would reduce its debt by approximately $ 30 billion upon completion of the transaction, using the proceeds from the deal and existing cash. The company announced it would charge a fee of $ 3 billion in the first quarter of 2021.
GE and AerCap stocks were each down about 5% in afternoon trading. S&P Global Ratings expects GE’s credit rating to be downgraded as “leverage will be higher than previously expected due to the consolidation of GE Capital’s financial data.”
“”This is the right time to further accelerate our transformation, “said Larry Culp, CEO of GE, in a press release announcing the deal.” This move will allow us to significantly reduce GE’s risk and continue on our path to becoming a well-capitalized company.
The companies are major customers of Boeing and rival Airbus. A combination of the two factors that analysts are calling the world’s largest aircraft rental company can push for better aircraft prices, just as Boeing and Airbus are trying to gain a foothold in the pandemic.
According to consulting firm Ascend by Cirium, aircraft leasing companies own about half of the more than 22,000 single- and double-ship commercial aircraft.
“You will have a lot of bargaining power,” said Eric Bernardini, co-director of aerospace, defense and aerospace practice at consulting firm AlixPartners.
Culp told analysts on Wednesday that he expects the aviation industry’s recovery to add value to their proposed stake.
“When the industry regains its stake in the combined business, it will undoubtedly be worth more than it is today,” said Culp. “We would never have sold Gecas for cash at this point in the cycle. Fortunately, we really don’t do that today. We are putting GE together with a key partner and I believe we will create more value for the GE shareholder over time.”
Gecas is closely tied to GE’s massive aircraft engine business as the leasing company often finances and leases aircraft equipped with GE engines that the company later operates.
Gecas owned, serviced, or ordered over 1,600 aircraft and had assets of $ 35.86 billion at the end of 2020. AerCap owned, managed, or ordered approximately 1,330 aircraft with $ 42 billion in assets as of the end of last year.
GE said $ 34 billion net worth, including engine and helicopter leases, along with purchase commitments and more than 400 employees would be transferred to AerCap. GE may appoint two directors to new seats on AerCap’s board of directors.
Ireland-based AerCap, whose shares are traded on the NYSE, had a market cap of nearly $ 7.27 billion as of Tuesday’s close of trading. Shares are up nearly 4% this week after the Wall Street Journal reported Sunday that the two companies were close to a deal.
According to GE’s annual report, the Gecas unit posted a loss of $ 786 million last year, compared with a profit of $ 1.03 billion the previous year. AerCap posted a net loss of nearly $ 299 million last year, after gaining more than $ 1.1 billion in 2019, and posted a fourth quarter profit of $ 28.5 million.
