By Thomas Gryta and Miriam Gottfried
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (January 31, 2019).
General Electric Co.'s lending business, GE Capital, has run up
deep losses in recent years, but it also contains one of the
embattled conglomerate's best assets: the world's biggest
aircraft-leasing operation. Now, several potential suitors are
circling the unit.
The interest comes as GE sells off businesses to chip away at
its more than $100 billion in debt. Among those that have expressed
interest in buying some or all of the aircraft-leasing operation,
called GE Capital Aviation Services, are investment firms Apollo
Global Management LLC, Blackstone Group LP and KKR & Co.,
people familiar with the situation said.
The operation owns and manages nearly 2,000 planes and
helicopters that it leases to more than 200 carriers, ranging from
giant American Airlines Group Inc. to Jet Airways Ltd in India. It
generates a stream of cash that has helped prop up the rest of the
troubled GE Capital.
A sale could help GE eliminate up to $40 billion in debt, much
of which is associated with the aircraft operation, according to
analysts. But it also would leave a shrunken GE Capital with few
profitable businesses at a time when it is plugging a $15 billion
hole in its insurance reserves.
In October, Chief Financial Officer Jamie Miller said GE hadn't
made decisions or plans to do anything with the aircraft unit. "We
receive inbounds on this business all the time," she said,
referring to interest from potential buyers. "As we think about the
timing and the pace of execution on our overall plan, that is
something we could think about."
The aircraft unit's large finance operation doesn't fit into the
conglomerate's strategic shift away from lending.
GE Chief Executive Larry Culp and company directors are still
trying to find a way to neutralize the problems in GE Capital,
including the option of winding down the entire operation, as GE
splits apart its manufacturing operations, people familiar with the
matter said.
The situation is emblematic of the Gordian knot that is GE
today: It can cut debt by selling its most valuable pieces, but
then it will lose their future earnings while its core power
business is losing money.
"Just shrinking the balance sheet, but leaving still plenty of
debt/insurance liabilities and money-losing businesses that don't
have much value does little to solve the problem," JPMorgan analyst
Stephen Tusa said earlier this month.
GE expects to close the sale of its railroad transportation unit
next month, is selling down its stake in oil field firm Baker
Hughes and is preparing to spin off its health-care division.
Danaher Corp., a conglomerate that early last year approached GE
about buying part of the health unit, recently expressed renewed
interest, people familiar with the matter said.
When the company reports fourth-quarter results Thursday,
investors will be looking to Mr. Culp to discuss his latest
thinking on the turnaround plans, the strategy to pay down debt and
profit targets for the year.
The aircraft-leasing unit has about $41 billion in assets, and
accounted for more than half of GE Capital's $9.1 billion in 2017
revenue. As of the end of September, it had made commitments to buy
aircraft with a listed value of more than $38 billion.
Divesting the unit would take away a major source of cash and a
tool previously used to help the company sell its jet engines.
Aviation lease experts said the heavy debt a buyer would have to
take on to acquire the operation likely crimps the list of
candidates.
AerCap Holdings NV, the GE unit's biggest rival, has signaled it
would prefer to buy back its own stock than do a deal. Air Lease
Corp. Executive Chairman Steven Udvar-Házy this month told an
industry conference that to acquire the unit "will require a lot of
money, both debt and equity. I think it is a challenging
opportunity."
Analysts have conflicting views on the attraction of the
portfolio. Nicholas Heymann, an analyst at William Blair & Co.,
expects many interested bidders and a valuation that could exceed
$40 billion. Ratings agency Fitch assumes any sale would be about
$40 billion, with the proceeds paying down debt within GE
Capital.
Some bankers have said, based on prior transactions in the
industry, the overall value of any deal would be less than that.
The equity value -- or the net proceeds to GE after debt relief --
could be below $10 billion, they said. Apollo's interest in the
leasing unit was earlier reported by Bloomberg News.
John Inch, an analyst with Gordon Haskett Research Advisors,
said the value of the operation in a sale is difficult to estimate,
and a buyer may not want parts of it, including its helicopter
operations. It is difficult to estimate the amount of cash a sale
would produce, partly because the value of the underlying leases
and debt isn't known, he said.
"I think maybe $5 to $6 billion in proceeds. But it could be
zero," he said.
Nathan Flanders, a credit analyst at Fitch Ratings, said the
size and order book of the unit would be attractive to those
looking to enter the leasing business, including private-equity
firms, insurance companies, pension funds and sovereign-wealth
funds. "It is a plug-and-play platform for the buyer," he said,
adding that it may not be as attractive to those in the business
already.
One hitch in any deal is that a buyer would need to raise the
full price in cash because the leasing unit doesn't have debt of
its own to transfer with the sale. Instead, its debt is under GE,
which means a buyer would have to pay cash, then raise new debt
with its newly acquired assets.
"It adds risk," Mr. Flanders said. "It could be another hurdle
for potential buyers to raise that much debt for the business."
--Robert Wall and Dana Mattioli contributed to this article.
Write to Thomas Gryta at thomas.gryta@wsj.com and Miriam
Gottfried at Miriam.Gottfried@wsj.com
(END) Dow Jones Newswires
January 31, 2019 02:47 ET (07:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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