Bohai Leasing, a subsidiary of the Chinese airline-to-logistic conglomerate HNA Group, has agreed to pay $2.51 billion to snap up Irish aircraft lessor Avolon in a deal at a valuation that underscores China’s growing appetite for acquisitions within the global jet leasing sector and raises the bar for future deals in the sector.
China’s only A-share listed aircraft leasing company will pay $31 in cash for each of all the outstanding common shares of New York Stock Exchange-listed Avolon, the companies said on Thursday.
Apart from the steep valuation the deal was remarkable for the unusual competition between two Chinese companies bidding for the same asset, all-be-it a privately controlled entity and a state-owned one. It was also the largest overseas acquisition by an A-share listed company, according to Dealogic data.
The deal values private equity-controlled Avolon at $7.6 billion (including debt) and marks the end of a year-long battle for the Dublin-based group. Bohai outbid another Chinese suitor, AVIC Capital, a subsidiary of state-owned aircraft manufacturer Aviation Industry Corp of China, which first began talks with the company a year ago.
The $31 price tag represents a 31% premium to Avolon’s closing price on July 13, one day ahead of a first announcement revealing Bohai’s offer to purchase a 20% stake at $26 per share. This was subsequently sweetened to $32 after AVIC emerged with a counter offer to purchase 100% of the common stock at $30 per share. It was a 55% premium to the IPO price last December.
The deal has been valued at 1.72 times book value based on a first quarter book value per share of $18. This means Bohai has paid a juicy premium over other NYSE-listed comparables such as AerCap and Air Lease.
Netherlands-headquartered AerCap is currently trading at 1.07 times book value and US-based Air Lease at 1.16 times.
Credit Suisse believes Avolon’s purchase price makes both companies attractive acquisition opportunities.
"This is a transformational deal for the sector and will trigger more deals," said one person involved in the deal. "Given AVIC failed to secure the asset, it's highly likely they will be on the hunt for a similar assets."
To be sure, this purchase price has been fixed at $1 per share lower than a previous offer last month. In a joint statement the two companies said it had been adjusted to reflect “significant volatility across global equity market". But still the valuation raised eyebrows in the industry. The sell side negotiated a $350 million deposit, equivalent to about $4 a share and was comfortable with Bohai's funding in the form of bridge loans from its relationship PRC state-owned banks, which have been heavily incentivized to provided overseas acquisition financing.
Bohai also has a CNY16 billion share placement in the A-share market which is already fully subscribed for the development of its leasing business. At one point during negotiations Bohai was trading at 3.5 time price to book and even after the recent stock market correction it trades around two times, making the acquisition price look reasonable from its shareholders' point of view.
In a recent research report, Credit Suisse noted that China’s Ministry of Commerce flagged overseas M&A as a key strategy for leasing companies as part of its 2011 five-year plan.
It also said Avolon’s purchase made a lot of sense for Bohai given the company’s “young fleet as well as its management team, which has demonstrated strong sales-leaseback capabilities and deep relationships with global airlines.”
The deal is expected to be completed by the first quarter of next year, with Shenzhen-listed Bohai increasing its deposit by $100 million to $350 million to “provide greater certainty of value and reflecting its commitment of the transaction”.
There were concerns in Avolon's camp that China might impede Bohai's bid to help AVIC, which was in a consortium with CIC, but ultimately Bohai seemed the safest bidder in the end in terms of financing, according to one person involved in the negotiations.
The deal has been approved by Avolon’s board and endorsed by privately-owned HNA Group, Bohai’s largest shareholder.
In the statement, Avolon’s chairman, Denis Nayden, said Bohai will “enhance Avolon’s profile, positioning and relationships in the Chinese aviation market – a market which we believe offers one of the most compelling growth opportunities in global aviation over the next two decades.”
The takeover comes at a time when China is poised to overtake the US as the world’s largest domestic aviation market.
In recent years, a slew of Chinese firms with deep pockets have entered the booming aircraft leasing sector by buying jet lessors and providing funds to jet deals. New entrants include: the Industrial & Commercial Bank of China (ICBC), the world’s largest lender by assets, China Development Bank and Bank of China.
CDB Leasing is looking for a Western-headquartered leasing platform with a quality fleet, according to an industry source. They bid for RBS Aviation Capital in 2012 but struggled to get state approval. ICBC Leasing is also on the hunt for a global platform, he added. Cheung Kong is expanding its fleet as is Chow Tai Fook's venture Goshawk.
In 2012, a Chinese consortium led by New China Trust agreed to buy the aircraft leasing business of American International Group (AIG). The deal ultimately failed but at that point the consortium was willing to pay $4.23 billion for an 80.1% stake in International Lease Finance Corp (ILFC), which at the time was the largest ever bid for a US company by a Chinese firm.
"These expanding Chinese firms need equity to grow so it makes sense to be a publically listed company," said the industry source. "The Avolon acquisition multiple has also helped by dragging comps up a bit." CDB Leasing has been mooted as an IPO candidate in the industry.
According to a Bloomberg Intelligence estimate, leased planes account for 36% of all aircraft in China. Earlier this year, Boeing also forecast that China would spend about $950 billion over the coming two decades to purchase roughly 6,330 commercial jets.
"There have been no signs that travel demand has been impacted by China's growth decelerating," said the industry source.
Since last year, the government has been increasing its encouragement to domestic leasing firms to “go out” and compete against larger Western players such as AerCap and the Irish-American firm GE Capital Aviation Services.
In the statement, Bohai CEO Chris Jin said, “Our vision is to build each of our transportation finance businesses into global leaders...The company [Avolon] is a strong complement to our existing investment in the aircraft leading sector.”
Established in 2010, Avolon owns and manages about 260 aircraft across 33 countries. The average age of its owned fleet (2.6 years) is also the youngest among major jet lessors, according to the company.
At the time of its initial public offering last December it ranked as the world’s ninth largest aircraft leasing firm by assets. The IPO was priced at $20 per share, with private equity firms Cinven, CVC Capital Partners and Oak Hill remaining its three largest shareholders.
Hong Kong-headquartered aircraft leasing specialist Bravia Capital is advising Bohai. Bravia Capital is a boutique advisory firm that also has a private equity arm. It has worked on HNA Airlines' aircraft financing loans before and more recently some of its acquisitions of assets.
This story was last updated on September 6 to add context