For buyers seeking to capitalize on the airline industry’s shift away from buying planes, no aviation-leasing company is cheaper than AerCap Holdings NV. (AER:US)
The biggest independent jet lessor by number of planes traded at 6.5 times profit yesterday, 57 percent less than the average of publicly listed peers Air Lease Corp., Aircastle Ltd. (AYR:US) and Fly Leasing Ltd. (FLY:US), according to data compiled by Bloomberg. With the $1.69 billion company valued (AER:US) at 19 percent less than tangible net assets, pursuing a deal is attractive to management after Royal Bank of Scotland Group Plc sold its aviation unit this year at a premium to book value, said Wells Fargo & Co. (WFC:US)
Carriers are increasingly leasing rather than buying, driving the proportion of the global fleet that’s rented to 35 percent from 25 percent in 2000, according to Fitch Ratings. At the same time, Cerberus Capital Management LP, the second- biggest shareholder (AER:US), is paring its stake in AerCap six years after the private-equity firm took the company public. AerCap, which is studying options including a sale, should be valued at $23 a share in a takeover, said stockholder Lyrical Partners LP, an 84 percent premium to yesterday’s close.
“You’re not just buying the planes, you are buying the whole business about how you buy, lease, rent-out, maintain -- all the operations that go with that are worth a lot,” Andrew Wellington, who oversees $330 million as New York-based managing partner and chief investment officer of Lyrical, said in a telephone interview. “If somebody wanted to really get big in this space, they would do well by starting with AerCap.”
Frauke Oberdieck, a spokeswoman for Amsterdam-based AerCap, said the company had no comment on market rumors. AerCap disclosed in May and repeated in June that it’s studying alternatives including a sale.
The jet-leasing industry has expanded since its creation in the 1970s as carriers seek to preserve capital following a string of bankruptcies. Lessors often purchase planes directly from Boeing Co. (BA:US) and Airbus SAS, taking strategic positions by locking in delivery slots years away and betting that air travel will grow and fuel prices will rise, requiring airlines to expand their fleets to meet demand and save on fuel costs with newer, more efficient equipment.
They can also enter into sale-leaseback arrangements whereby the airlines place the orders and sell the jets to companies such as AerCap and Air Lease, which at $1.92 billion is the only U.S.-traded leasing company with a bigger market capitalization. Rivals include units of General Electric Co. (GE:US) and American International Group Inc. (AIG:US), as well as closely held Jackson Square Aviation LLC and Avolon.
Fitch said July 11 that the industry’s share of the global fleet has increased about two-fifths during the past decade. Orders and commitments from leasing companies dominated this week’s Farnborough air show outside London, the biggest aerospace exposition of the year. All of the $20.6 billion in deals Boeing identified there were with lessors, not airlines.
AerCap said in a July 11 statement that it signed lease agreements for 20 aircraft during the second quarter. It had 294 owned or managed planes as of March 31, according to the company’s website.
Cerberus, the private-equity firm named after the mythical three-headed creature that guards the gates of hell, agreed to sell 5 million shares back to AerCap in June. The investment company listed AerCap in a 2006 initial public offering at $23 a share. The stock subsequently plunged (AER:US) as low as $1.83 in 2009 following the global financial crisis and a 19 percent decline in AerCap’s net income in 2008.
A representative of New York-based Cerberus declined to comment.
While AerCap rebounded (AER:US) to $12.52 yesterday, including a 12 percent rally on July 10 as a Wells Fargo analyst said the company could fetch at least $17 a share in a deal, Cerberus hasn’t recouped all losses that followed the IPO. Earnings at AerCap, which fell 17 percent last year, are projected to surge 53 percent in 2012, according to the average of analysts’ estimates compiled by Bloomberg.
The shares rose 1.8 percent to $12.75 today, closing at the highest level since March 2. The stock advanced as much as 4.5 percent during the trading session.
Sumitomo Mitsui Financial Group Inc. completed its purchase of the aircraft-leasing division of Edinburgh-based RBS for about $7.3 billion, RBS said June 1. The sale price implied a less than 5 percent premium to book value, or assets minus liabilities, according to Gary Liebowitz, an analyst at Wells Fargo in New York.
AerCap “saw RBS get sold at a small premium to book value,” he said in a phone interview. “So, if they want to maximize value and if the private-equity investors want an exit, then that would be one way to possibly maximize value.”
China Development Bank Corp., Wells Fargo and a consortium led by Macquarie Group Ltd. (MQG) also bid for the RBS division that Sumitomo won, people familiar with the process said in November. Earnings growth at AerCap, estimated (AER:US) to average 25 percent a year through 2014, may lure bids from those banks, according to FBR & Co.’s Scott Valentin. Gregory Lewis, an analyst at Credit Suisse Group AG in New York, said China Development Bank might be most drawn to AerCap.
“It makes perfect sense to me why banks would be interested,” Valentin, an Arlington, Virginia-based analyst, said in a phone interview. “I’m surprised we haven’t seen more banks do something this big,” he added. “If you can get comfortable with the management team you’re buying, and we think AerCap is a strong management team, it’s a very high-returning investment.”
Xu Fei, a China Development Bank spokesman, didn’t answer calls to his office and mobile phone. Elise Wilkinson, a spokeswoman for Wells Fargo, said the company doesn’t comment on market rumors. Navleen Prasad, a spokeswoman for Macquarie, declined to comment.
AerCap Chief Executive Officer Aengus Kelly joined the industry in 1998 with Guinness Peat Aviation, a predecessor of the current company. He ran AerCap’s operations in the Americas before assuming the CEO role in 2011. Keith Helming, the chief financial officer since 2006, previously worked as CFO of the aircraft-leasing division of GE, the world’s biggest jet lessor by number of planes and the 11th-largest company in the world by stock-market value.
AerCap’s return on equity, a measure of profitability, will be 11.07 percent this year, analysts’ estimates compiled by Bloomberg show, higher than its three publicly traded peers.
While a takeover is a possibility, a deal probably isn’t coming soon, according to Ray Neidl, an analyst at Maxim Group LLC in New York. He has a $17 share-price estimate for the company even without a takeover, based on the assumption the stock should trade for about eight times his forecast of 2013 adjusted earnings of $2.11 a share.
“The management of AerCap is very frustrated about their low stock price,” Neidl said in a phone interview. “It would be logical for them to hire an investment bank to look at opportunities to increase stock value,” he said. “I don’t think a sale is imminent, but management is just looking at their options.”
Air Lease trades for 24 times earnings, or more than triple AerCap’s multiple. Los Angeles-based Air Lease (AL:US) is run by Steven Udvar-Hazy, the chairman and CEO who calls himself the godfather of aircraft leasing after helping create the industry while still in college.
For AerCap, the company’s second-biggest shareholder, Cerberus, probably wants to finally exit its investment after the shares languished for years, Credit Suisse’s Lewis said. Cerberus owns about 20 percent of the company.
“The issue is: How do they monetize their position?” he said in a phone interview. “Private equity in general wants to hold their asset for a time and then liquidate their position. They tend to not be long-term investors.”
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