A Chinese group has failed in its bid to buy a top global aircraft leasing firm for the second time in two years, with word of the collapse of talks by domestic aviation giant AVIC and Chinese sovereign wealth fund CIC to purchase Europe’s Avolon.
This second case follows another failed bid by a lesser-known group to buy US giant ILFC last year, and shows that Chinese firms still have a bit to learn when doing this kind of M&A. Some politics may also have been at play in this latest case, since AVIC is also designing a new large commercial aircraft that it hopes will someday compete in a lucrative market now dominated by Boeing (BA.US) and Airbus (AIR.PA).
From the broadest perspective, the collapse of this deal is probably in everyone’s best interest, and is likely to see the privately-owned Avolon opt for a New York initial public offering instead of a sale of the company. The IPO route will ensure that Avolon continues to be run based on commercial principles, which is in the interest of not only its owners but also its customers.
If the AVIC-CIC group had closed a deal, Avolon almost certainly would have been at least partly politicized and forced to buy the new commercial jet being developed by Aviation Corp. of China (AVIC) and its subsidiary, Commercial Aircraft Corp. of China (COMAC).
All that said, let’s retrace the brief history of this deal and the latest reports that say the talks have formally ended without an agreement. Word of the talks first emerged in August, when media reported a deal between Avolon’s private equity owners and the AVIC-CIC group could be worth up to 12 billion euros (US$16 billion). That earlier figure looked a bit high and probably included a large amount of assumed debt. The latest reports say that the talks entailed a much lower U$4-5 billion price tag, which looks a bit more reasonable, before they recently collapsed.
No reason is cited for the collapse, but the reports point out that Avolon had previously registered in June to make an IPO in New York. The company is currently owned by a private equity group that includes Cinven Ltd., CVC Capital Partners and Oak Hill Capital Partners, as well as Singapore’s sovereign wealth fund GIC, which are now looking to exit their investment.
Thus the bid by CIC and AVIC looked like a last-minute effort by the private equity group to get more money for Avolon by selling to a Chinese buyer that was interested in the company for strategic reasons rather than as a purely financial investment.
China is quickly becoming the world’s largest aviation market, fueled by a growing middle class that includes people who travel for both leisure and business. It’s already one of the top global markets for Boeing and Airbus, and Beijing would obviously prefer to spend the billions of dollars its airlines now pay to that pair to a domestic aircraft builder instead.
Likewise, Beijing would also like to control one or more major aircraft leasing companies, many of which do big business with Chinese airlines.
Two years ago, China tried to achieve that latter goal when a group of less-known domestic buyers launched a bid for ILFC in a deal that would have valued the US aircraft leasing giant at US$4.8 billion. That deal ultimately fell apart for unspecified reasons, and the company’s owner ended up selling it to AerCap Holdings NV.
In that case financing issues probably played a role due to inexperience from the buyer group, but politics may have also entered the equation due to the sensitivity of such a purchase.
I doubt that financing problems played much of a role in this latest case, since both AVIC and CIC are major sophisticated investors with easy access to billions of dollars. Instead, the pair probably were scared off by a high price that Avolon’s owners were seeking, and also by concerns that the deal could face political headwinds in Europe.
More broadly speaking, this latest failed bid could also signal that China no longer intends to pursue major purchases in this space, which is probably a wise decision due to the heavy politics that would almost certainly become involved in any large transaction.
Bottom line: The collapse of a Chinese buyer’s bid for aircraft leasing firm Avolon was probably due to price, and could signal that China won’t pursue similar deals due to political factors.
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