2023-09-13 10:02:32 ET
Summary
- General Electric is selling over half of its 33% stake in AerCap through a secondary share offering. 40% of this is repurchased by AerCap.
- AerCap management likely stopped share buybacks to negotiate a better deal price with GE.
- This deal and the likely follow-on open market buyback are very accretive for shareholders. We walk through the valuation.
General Electric's AER stake sale: A basic overview
AerCap (AER) announced a secondary share offering by its largest shareholder, General Electric (GE). GE owned 77.8 million shares worth $4.8 billion, or a third of the company. In the late evening, the offering was priced and upsized.
The results tell us GE is selling a bit more than half its stake to the public at around $59 per share. The total sale represents 18% of AerCap's market cap. I suspect AerCap management stopped the share buyback in July to not increase the market price, and to be able to buy a block cheaper. Indeed, AER is buying 37% of the offering as a share repurchase at the advantageous lower price of $57.5 per share.
This leaves us with a net supply worth 11% of the shares outstanding flooding the market. A small overview:
Company press release: GE's secondary share offering
As you can notice in the last line of the picture, after this large secondary offering, GE's remaining stake will still be 16.5% of the current market cap. Given that GE has sold a first tranche (a billion dollars, half of which goes to AER's buyback) in spring this year, the market will probably start discounting a (now more likely) scenario of another secondary sale not too far off, and the associated overhang. I will have to note, though, that the remaining Russian claims (at face value $2.7 billion) - which would be considered excess capital - more than cover this remaining GE stake ($2.2 billion).
The GECAS deal magic is happening now: Pro-forma math and valuation
My following table will run through the NAV per share step by step as AerCap's block repurchase and remaining excess capital budget for follow-on open market unfolds rapidly. This is not the first time AerCap has endeavored to devour the share capital of its takeover prey. The same playbook was used on the post-GFC AIG restructuring, ILFC sale to AER, and consequent mammoth buybacks below NAV.
When reading this table, it is important to realize that prior to both the Aeroflot cash hitting the and the GE secondary offering, AER was already at the bottom of its desired D/E leverage ratio (i.e. 2.50X).
Pro-forma math on GE secondary offering and H2 (Author's own calculations based on company documents)
We can see the deal generates lots of value for shareholders out of the gate.
As I lay out at the bottom of the table, the immediate potential for an aggressive open market buyback is high given there is leftover excess capital even after AER devours the GE block deal. As I mentioned earlier, I believe the open market purchases were paused to negotiate a better mammoth block deal price with GE. I fully expect management to aggressively resume the open market buyback, especially in the light of Aengus Kelly's comments on the last Aircraft Finance conference a few days ago "our shares are the cheapest aircraft on sale right now", and on the other hand the historically high gain on sale margins AER is realizing in the last quarters:
Recent Gains on Sale metrics by AerCap (Company documents)
The final NAV estimate I reached in the second last table is before potential new large buybacks from other potential Russian claim receipts or further aircraft sales momentum. We see that the NAV per share can quickly rise beyond 38% at a $59 share price in the foreseeable future. I believe the news is a step-change in shareholder value.
Unlevered gains on aircraft sales used to be between 8% and 15% since IPO. I believe Q1 and Q2 were truly exceptional. I expect H2 to be similar to H1. In my math to arrive at a pro-forma NAV per share above, I only allowed for an estimate of Q3 accounting profit to build up as excess capital. In reality, AER is not growing its equity value proportionally with the accounting profit, as it is happily selling many higher risk, older assets to recycle into buybacks, so the gross receipts of this activity alone (excluding leasing profits) counts for another cash build of ~$300 M per quarter (second last column in the table) not taken into account.
If AER is able to sell $500 M of assets (somewhat slower pace vs H1) at a 20% unlevered gain (lower than the H1 23% average) - or a 74% levered gain on equity book value - it would unlock another repurchase of 500/(1-38%) - 38% being my pro-forma NAV discount. This means $806 M of equity book value accruing to non-selling shareholders, by selling only $287 M of equity book value (500/1.74). The accretion from this public-private arbitrage is exceptional. It would allow to retire 4% of all shares by selling only 1.4% of the equity asset base, for a total accretion of 2.7% in H2 2023. What is exceptional, is that this arbitrage is even improving the business risk profile at the same time.
Conclusion
I believe the open market buyback was recently paused to not run up the share price as AER management sniffed out a GE block opportunity. As I laid out in my table, the excess capital was already available to continue doing open market buybacks, given the unprecedented advantageous resale market of older aircraft, but none have happened since July. Today, AER only absorbs 35% of the offering on day one, leaving further accretion at high pro-forma NAV discounts for the remaining open market buyback as there is an overhang. This was a highly optimized combo of behaviors' from AER, and I know of few CEOs that do buybacks better than Aengus Kelly. As with the ILFC transaction almost a decade ago, the real takeover magic is happening as we speak. AerCap is a snake that devours its larger prey steadily and very efficiently.
Both the resale market and the remaining Russian claims could provide the capital to completely buy back the remaining GE stake.
Risks
Price risk: overhang from market perception of GE sale(s) overhang. Mitigant is AER's potential to build up excess capital from both Russian claim settlements and a short aircraft environment to rapidly buy into this.
Leverage: AER is dependent on capital markets for sourcing re-financings for its debt. Mitigant: It is both compared to its own history, and its competitors, lowly levered. It has a very wide geographical base of lenders, and a teens percentage of assets encumbered by secured financings which allows for additional secured financing if the unsecured financing market dries up.
For further details see:
AerCap's Repurchase Playbook With GE Is A Piece Of Art