AerCap Holdings NV (AER) agreed to buy International Lease Finance Corp. from American International Group Inc. (AIG) for $5 billion to create an aircraft lessor rivaling General Electric Co. (GE)’s Gecas unit for size.
AerCap will pay U.S. insurer AIG $3 billion in cash and the balance in stock, taking control of a 40-year-old business that helped create a leasing industry now accounting for 40 percent of the $100 billion spent globally on new airliners each year.
Combining with ILFC, already the second-largest leasing company, more than triples the AerCap fleet to almost 1,400 planes, about 300 short of the GE total. AerCap, which secured the deal after Chinese bidders missed deadlines, also gains early delivery slots for the latest Boeing Co. (BA) 787s and Airbus SAS A320neos and A350s, for which it can charge top rental fees.
“We’re creating the industry leader here,” Aengus Kelly, chief executive officer at Schiphol, Netherlands-based AerCap, said on an analyst call. “The order book is the jewel in the crown. Given the associated delays with those planes, especially the 787, the pricing and the delivery slots are unbeatable.”
AerCap jumped 33 percent, the most since January 2009, to $33.17 at the close in New York. New York-based AIG gained 1.1 percent to $50.28.
The deal, which includes 97.6 million AerCap shares and is set to close in the second quarter, gives the Dutch lessor control of the merged business, with AIG holding 46 percent.
The combined company will have 1,329 aircraft, according a slide presentation, with total assets of $41 billion. Gecas, as GE Capital Aviation Services is known, said by e-mail it owned or managed more than 1,630 planes at the end of the third quarter and had assets of $47 billion, providing no further comment.
“We are going to be on a very similar level,” Kelly said.
The new business has 385 planes on order, mainly via ILFC, AerCap said, with contracts for 77 787 Dreamliners, 29 A350 wide-bodies and 155 re-engined A320neo single-aisle aircraft.
“We see this is a positive development for the sector,” said John Higgins, president of Dublin-based lessor Avolon Aerospace Leasing Ltd. “Having an industry participant as big as ILFC out there with uncertainty about where they’d sit was casting a shadow, even in terms of asset valuations.”
AIG turned to AerCap after a group led by P3 Investments Ltd. of Hong Kong failed to deliver $4.2 billion it had agreed to pay for an 80 percent stake. The insurer, saved from collapse by a 2008 bailout that reached $182 billion, has been seeking to narrow its focus as regulatory watchdogs increase their scrutiny of large financial firms.
UBS AG and Citigroup Inc. will provide $2.75 billion in financing, with AerCap also using some of its own cash to fund the purchase, Kelly said. The deal’s value increases to $26 billion including the assumption of $21 billion in ILFC debt.
ILFC is “not a good fit with an insurance-company balance sheet, particularly with the new regulations,” AIG Chairman Steve Miller said in a Bloomberg Television interview on Dec. 12, adding: “A very capital-intensive business like that really doesn’t belong in an insurance portfolio.”
AIG will provide a $1 billion unsecured revolving credit facility to AerCap, the companies said, with its stake in the new business subject to a phased lock-up of 9 to 15 months.
ILFC’s net income was $410.3 million in 2012, though the business posted a loss of $599.2 million in the first nine months of 2013 on impairments of aircraft.
Kelly said AerCap first explored buying ILFC in 2009, before deciding debt liabilities were too high. Those issues were resolved last year with payments cut to a manageable level, prompting it to put together an offer, he said.
Standard & Poor’s Ratings Services and Fitch Ratings said they may cut AerCap to below investment grade on the deal. S&P said its debt will be equal to more than 80 percent of capital.
AerCap is gaining a business renowned for its pioneering approach under founder Steven Udvar-Hazy, who built Los Angeles-based ILFC from a startup into an industry giant before selling it to AIG for $1.16 billion in 1990.
Under the insurer’s ownership, ILFC benefited from the ability to borrow at low rates, an advantage that evaporated when the parent was hobbled by losses from subprime mortgages.
ILFC has since been led by former Airbus SAS executive Henri Courpron, whose role wasn’t specified today. AerCap said the acquired company will still have a presence in Los Angeles, though it will be run mainly out of the Netherlands and Dublin, where the buyer has offices.
AerCap said the deal still requires regulatory and shareholder approval. The lessor added that its largest investor, Waha Capital PJSC (WAHA), has agreed to back the transaction.
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