AER - AerCap Holdings

[Peregrine]

Here it is. https://www.aercap.com/media/news/aercap-to-acquire-ge-capital-aviation-services/

 

Still no mention of how much debt GECAS has.

 

That is not what matters. AER is issuing $25 bn in debt and 111.5 mm shares for this deal. At current AER stock price - that equates to ~80% debt/20% equity financed transaction.

 

Looks like AER values the GECAS assets at $34 bn (down from $36 bn at the end of 2020), so they're buying at a P/BV of 2/3 using AER stock at ~75% of BV. Accretive assuming the ROE profiles are similar but not like the ILFC deal.

 

It matters just because I wanted to look at it from another point of view. I'm not sure my math is correct so I welcome the push-back:

 

GECAS had $1B in profit in 2019. If Aercap is buying that for $7B, that's a 7x multiple, but there's interest costs in the mix. Let's say Aercap gets a 2% interest rate on the $24B. That's $480M that you need to take from the $1B in profits, leading to $520M of profits per year, leading to a multiple of 13.4x.

 

The issue is, what were the interest costs before the acquisition that led to the $1B dollars in net income for GECAS that will be now replaced by the $480M?

 

GECAS's $1 bn in profits in 2019 includes their own interest costs. I think the spreads are similar and the ROE profiles of both businesses are similar. I look at it like this: AER is issuing stock at 0.75x BV (at $55 price) to to buy GECAS at  P/BV of 0.67x. It's accretive but not hugely so.

[manuelbean]

Yeah, but without knowing the amount of debt that was inside GECAS, even if we knew that the spreads were the same, we can't know for sure what the interest was, and that would be important to gauge its profitability.

 

I understand your point, I'm just not sure if Book Value is the best metric. Yes, 2019 profit is also probably not the best metric, I know, but...

[Peregrine]

Yeah, but without knowing the amount of debt that was inside GECAS, even if we knew that the spreads were the same, we can't know for sure what the interest was, and that would be important to gauge its profitability.

 

I understand your point, I'm just not sure if Book Value is the best metric. Yes, 2019 profit is also probably not the best metric, I know, but...

 

I have a feeling that this deal is less leveraged for AER - as in they're issuing less debt than the debt outstanding that was funding GECAS. At $34 bn to $9bn equity value, that's just a 3.78x A/E ratio. Most lessors are leveraged at >4x. It will increase the D/E ratio as of now because of the equity that's being issued.

[keerthiprasad]

OK deal at best for AER, def not ILFC #2. 

 

Comparing BV is a good approach. The quality of the GECAS fleet is likely lower than AER's fleet...leads to some future uncertainty regarding BV.

[Peregrine]

OK deal at best for AER, def not ILFC #2. 

 

Comparing BV is a good approach. The quality of the GECAS fleet is likely lower than AER's fleet...leads to some future uncertainty regarding BV.

 

That's the assumption - but I'm not sure that's the case. The new AER fleet is only slightly older and now comprises of a higher mix of narrowbodies - which are a lot more liquid and faces less uncertainties than the widebody market. They also wrote down the fleet substantially - GECAS assets stood at $36 bn at end of 2020, now remarked at $34 bn and being bought for $30 bn at AER's current price. On a leveraged business like lessors, these impairments can lead to huge discounts on BV.

 

Crucially, Gus mentioned that these assets were all marked at cost and the impairments were taken on cost.

[manuelbean]

Here it is. https://www.aercap.com/media/news/aercap-to-acquire-ge-capital-aviation-services/

 

Still no mention of how much debt GECAS has.

 

That is not what matters. AER is issuing $25 bn in debt and 111.5 mm shares for this deal. At current AER stock price - that equates to ~80% debt/20% equity financed transaction.

 

Looks like AER values the GECAS assets at $34 bn (down from $36 bn at the end of 2020), so they're buying at a P/BV of 2/3 using AER stock at ~75% of BV. Accretive assuming the ROE profiles are similar but not like the ILFC deal.

 

I may be a little bit tipsy, but $24B plus 111,5 shares at $53 ($6B) plus $1B in cash/notes is $31B, right?

 

How do you get to the P/B of 2/3?

[manuelbean]

By the way, GE said that it will shed $30B in debt with this sale. Does that mean that $6B will go to the new entity? If GE gets $24B in cash, where do the other $6B come from? They may have the cash...

[Peregrine]

Here it is. https://www.aercap.com/media/news/aercap-to-acquire-ge-capital-aviation-services/

 

Still no mention of how much debt GECAS has.

 

That is not what matters. AER is issuing $25 bn in debt and 111.5 mm shares for this deal. At current AER stock price - that equates to ~80% debt/20% equity financed transaction.

 

Looks like AER values the GECAS assets at $34 bn (down from $36 bn at the end of 2020), so they're buying at a P/BV of 2/3 using AER stock at ~75% of BV. Accretive assuming the ROE profiles are similar but not like the ILFC deal.

 

I may be a little bit tipsy, but $24B plus 111,5 shares at $53 ($6B) plus $1B in cash/notes is $31B, right?

 

How do you get to the P/B of 2/3?

 

$34 bn asset value - which is what AER marked the GECAS book at - less $25 bn in debt, leaves $9 bn in equity. AER issuing 111.5 mm shares at $53 = $5.9 bn.

 

5.9/9 = 0.65. Incidentally, if the deal was more levered, the discount to book would be even higher.

[adhital]

I just listened to the "AerCap Investor Presentation" recording and my thoughts...

 

- BV/Share slightly improved.

- Lower depreciation. improved ROE and earnings. Not much SG&A synergy and that's not the reason for this deal

- expands capital market given its size and asset. Cost of funding as a competitive advantage. 

- Decision is based on a long-term view and not to get big. imply that it's much better than buying back its share at the current price.

- Asset sale will continue as they've been doing it for the past many years

- New opportunity in oil/gas recovery, no1 teams from both companies, improved customer relations by cross offerings, etc, etc

 

I sense that management is being very careful not to imply that they're getting a bargain and that the intangible benefits for the long term are big for aercap shareholders. They might be trying to be conservative and to appease both shareholder base.  probability to earn mid-teens  IRR is reasonable for many years at the curret stock price

[keerthiprasad]

OK deal at best for AER, def not ILFC #2. 

 

Comparing BV is a good approach. The quality of the GECAS fleet is likely lower than AER's fleet...leads to some future uncertainty regarding BV.

 

That's the assumption - but I'm not sure that's the case. The new AER fleet is only slightly older and now comprises of a higher mix of narrowbodies - which are a lot more liquid and faces less uncertainties than the widebody market. They also wrote down the fleet substantially - GECAS assets stood at $36 bn at end of 2020, now remarked at $34 bn and being bought for $30 bn at AER's current price. On a leveraged business like lessors, these impairments can lead to huge discounts on BV.

 

Crucially, Gus mentioned that these assets were all marked at cost and the impairments were taken on cost.

 

Yes I think Gus has proven himself and deserves benefit of doubt in this case! I was just sharing some general concerns. I'm not totally sold but am waiting it out.

[Xerxes]

At a very high level, GE gets a load of cash (~$30 billion) and nearly half of the equity value of the combined entity with the upside.

 

I am guessing Aercap/combined entity would have to tap the debt market, and that its stock price would have overhang of GE's large position.

[formthirteen]

I added to my AER position after the deal, in other words, I like and trust Kelly's capital allocation skills more than my own ???

 

It looks like the market doesn't like the deal and there's increased risk, but this is anyway a leveraged bet on "return to normal" for me. However, with all the virus variants this scenario does not look likely at the moment. I would sell at any sign of trouble handling the debt.

 

I think this article "Hard lessons help AerCap boss Kelly rebuild air finance titan" was pretty good:

https://finance.yahoo.com/news/hard-lessons-help-aercap-boss-201031243.html

 

For example, this quote:

No other company in aircraft leasing has ever done an M&A trade below book (value). Aercap has done it four times.

 

I think AYR was sold for 1.15x. AER is trading at 0.77 and got a discount on GECAS:

 

Kelly noted that AerCap had bought GECAS for less than its assets were worth on GE's balance sheet, a move that GE said would trigger a $3 billion charge.

 

 

After effectively reuniting the two wings of Ryan's empire by buying GECAS, Kelly vowed not to let Ireland's new AerCap-controlled leasing giant suffer the same fate as GPA.

 

"Those lessons were imprinted into me. You cannot run this business with a short-term liability structure or a balance sheet that is not conservative," Kelly said in an interview.

 

"The lessons were hard-learned. I won't lie to you, but they'll never be forgotten."

 

Known for his focus on managing risk, the 47-year-old Dubliner is a very different character from Ryan, whose highly leveraged bets built but then destroyed a leasing behemoth.

 

His strategy has been to keep the balance sheet strong to swoop on killer deals when times are tough for rivals.

 

Kelly noted that AerCap had bought GECAS for less than its assets were worth on GE's balance sheet, a move that GE said would trigger a $3 billion charge.

 

"No other company in aircraft leasing has ever done an M&A trade below book (value). Aercap has done it four times. Why are we able to do that? Because of our conservative balance sheet, because it puts us into a position to act when times are tough."

 

However, several aircraft transactions have been followed by asset writedowns by the buyer. Industry executives warned there was a risk of further pressure on the value of the assets being bought by AerCap as the coronavirus crisis hammers airlines.

 

"There's always a risk ... but you price all that in when you do the transaction," Kelly said.

 

He also dismissed any concerns over $25 billion of fresh debt, saying AerCap had kept a coveted investment-grade rating.

 

Kelly had himself flagged concerns about growing too big at an Airfinance Journal conference in January last year, when he suggested a fleet of about 2,000 jets would be tricky to run.

 

A significant number of low-value regional jets in GECAS' portfolio have been placed until the end of their life, and GECAS has switched a significant number of narrowbodies to freight, he said.

[Peregrine]

Aer traded down to $54 recently and I think it's gotten more interesting. The company has managed through the pandemic extremely well, decreasing leverage, increasing liquidity, maintaining cash flows and keeping their utilization high. And because they've emerged from the worst of the pandemic in a pretty strong position, they will soon do a fairly accretive acquisition that will make them the largest lessor in the world by far. Over time, I think the company can generate a 11% type ROE and management will resume repurchases once the GECAS deal is consummated. Co currently trades at 3/4 of BV.