General Electric Co. and AerCap Holdings NV have yet to announce any deals, but investors applauded reports that the two companies are discussing a combination that would create a giant of aircraft finance.

AerCap gained the most in almost four months Monday while GE rose to the highest since May 2018. Already the worlds two biggest jet lessors, the companies are talking about getting even larger by joining their leasing operations, said people familiar with the matter. A deal may be reached as soon as this week, said the people, who asked not to be named discussing the talks.

Closing the Gap

AerCap’s aircraft portfolio has nearly caught up with GE’s

Source: Cirium

Note: Installed portfolio includes aircraft in service and stored

For GE, the negotiations spurred optimism that a transaction would accelerate Chief Executive Officer Larry Culps push to revitalize the once-mighty manufacturer. While details of the potential deal structure remain unknown, analysts said an agreement would be likely to diminish the risks of GEs financial services arm, which nearly sank the company during the 2008 financial crisis and has remained a trouble spot in recent years.

Investors have been cautious about GE Capital and other financial risks beyond the manufacturers core operations, Bank of America Corp. analyst Andrew Obin said in a client note. A smaller GE Capital would simplify GEs story.

GE rose 4.2% to $14.17 at the close in New York, the highest since May 2018. That brought the gain this year to 31%, the third-best on a Standard & Poors index of U.S. industrial companies. AerCap surged 13% to $57.53, the largest jump since November.

The companies declined to comment.

Extreme Uncertainty

The deal is expected to have a value of more than $30 billion, the Wall Street Journal, reported.

A sale of GE Capital Aviation Services, or Gecas, could garner GE about $25 billion, Bloomberg Intelligence said in a report in 2019 — before the pandemic gutted demand for flights. Last year, GE completed the sale of its bio-pharmaceutical business to Culps former employer, Danaher Corp., for $21.4 billion.

A deal would also mark a significant consolidation in the leasing sector at a time of extreme uncertainty for aviation, said John Strickland, who runs London-based airline advisory firm JLS Consulting.

The pandemic has pushed airlines around the world to cancel new jetliner orders, push back delivery dates and defer lease payments. As middlemen, aircraft leasing firms have suffered while also playing a critical financing role to keep deliveries flowing, often with sale-leaseback deals that hand cash to airlines with jet handovers.

A combination of Gecas and AerCap would have greater negotiating clout with manufacturers like

Boeing Co. and

Airbus SE, while being able to focus on the strongest airline customers during the recovery, when many will remain reliant on lessors for financing flexibility.

A tie-up would be likely to receive scrutiny from antitrust authorities, other regulators and business partners, given the weight of AerCap and Gecas in the sector.

Aengus Kelly, chief executive officer of AerCap Holdings NV, poses for a photograph at the Singapore Airshow in Singapore, on Tuesday, Feb. 6, 2018. AerCap, the aircraft-leasing company, is willing to work with Hainan Airlines Holding Co. given its viable business model even as its parent HNA Group Co. comes under intense pressure to repay mounting debts.

Gecas had about $35.9 billion in assets at the end of last year, with about 1,650 aircraft owned, serviced or on order. AerCap, with assets of $42 billion, owned 939 aircraft and managed 105, according to a regulatory filing. The Dublin-based company, which is led by CEO Aengus Kelly, also had 286 planes on order, including jet models such as the Airbus A320neo and Boeing 737 Max.

Wall Streets applause for the deal underscored enthusiasm for the turnaround effort that Culp began when he took the reins more than two years ago. Since then, he has shed assets, repaid debt, cut costs and pushed operational improvements in a bid to boost earnings and cash-generation at GEs industrial units.

Yet some investors remain concerned about the risk that remnants of GEs once-mighty finance arm — especially the costly portfolio of long-term care insurance policies — could be a persistent drain on performance, said

Dan Babkes, a partner and senior research analyst at Pzena Investment Management. The firm held more than 89 million shares in GE as of Dec. 31, about 1% of the companys outstanding shares.

An AerCap deal that eases those concerns could signal that Culp sees a path to diminishing the risk in GE Capital on a more holistic basis, he said. That would a major positive for the stock.

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