Skepticism on the Street is brewing after General Electric (GE) was reported to be in talks to sell its airplane leasing GE Capital Aviation Services (GECAS) unit to private equity giant Apollo Global Management (APO) .
The shares popped over 5% in pre-market hours before paring gains down to 2% in early Monday trading as many analysts came out with questions about the potential valuation of the deal and its true impact on the company's long-term fortunes.
"While a potential GECAS transaction could be worth $40 billion, this would only match the book value of GECAS reported assets of just over $40bn," Gordon Haskett analyst John Inch wrote of the rumors on Monday morning. "Note that if GE ends up selling GECAS to Apollo, it would be doing so as the valuations of primary competitors AerCap Holdings (AER) and Air Lease (AL) have collapsed. Consequently, this could reflect GE's desperation to fire sale what it views as non-core (eg, Baker Hughes (BHGE) ) regardless of valuation based on an obvious need to raise cash as quickly as possible."
The company has worked hard to reduce its debt load in recent months as its credit rating fell in the back half of 2018, placing the company's over $100 billion in debt just steps above a junk rating.
GE's credit rating currently sits at Baa1 at Moody's Investors Service, and BBB+ at Standard & Poor's and Fitch after the recent downgrades. Inch said that the recently rumored aviation services sale could end up being a "sugar high" for investors seeking a quick cure to the company's chronic debt and credit concerns.
"With core GE Capital losing up to $2 billion annually (excluding gains), removing GECAS' $1.2bn in earnings would prospectively exacerbate reported GE Capital losses and further drag GE's overall difficult cash flow position," he commented.
Inch retained his "Underperform" rating for the stock amid his continued concerns with the company's "fire sales" of assets, which are fueled by looming liquidity issues in his view.
Nonetheless, he set a $10 price target for the stock, which would offer some upside to investors if achieved.
J.P. Morgan analyst Stephen Tusa added his own questions surrounding the deal by speculating that it could come in lower than the Bloomberg report anticipates based around the same comparisons drawn by Inch.
"The value of this book is a major TBD that is unlikely to be the 'silver bullet' to the leverage issue at GECS that Bulls appear to expect, and, to the contrary could represent another event in which the negative difference between book value as recorded on the GE balance sheet and market value of the assets is clarified," he wrote. "As had been the case for GECS since the wind down began in 2016 - if GECAS does not turn out to be valued as the 'crown jewel,' we believe it deflates the Bull thesis."
Even still, he argued that many GE watchers are missing a key storyline for GE as its mounting liabilities obscure the forest.
"Client conversations continue to be dominated by the debate around liabilities, but there is increasingly less discussion of the sustainable run rate of FCF/EPS," Tusa said. "On both fronts, there is nothing to change our view that $100 billion of net liabilities and zero enterprise FCF is the problem facing management and the right construct when thinking about how to get the story back to "normal" from an equity value standpoint."
Tusa remained "Neutral" on the stock, projecting further downside with a $6 price target tacked onto his analysis.
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