After a failed bid at buying the world's largest aircraft leasing company last year, China appears to be gearing up for a second attempt to enter the lucrative space with plans to bid for European giant Avolon (NYSE:AVOL). In this instance, the report is coming from a major Chinese newspaper that says China Investment Corp is teaming up with Aviation Industry Corp of China (AVIC) in the bid, which could be worth some 12 billion euros ($16 billion). That would easily make it the largest global acquisition by a Chinese firm outside the resource sector, reflecting the country's growing financial might as many European firms continue to struggle with after-effects of the continent's debt crisis of several years ago.
I'll give a strong disclaimer from the start by saying I'm not completely convinced that this deal is actually happening, since no western media had written about it. Instead, the lone report comes from the Shanghai-based China Business News, one of the nation's leading financial newspapers that is usually accurate. (Chinese article) The nature of the newspaper's sourcing, combined with its general reliability, lead me to believe there's a strong chance the news is correct, perhaps 70 percent or better.
According to the report, CIC and AVIC are currently conducting due diligence for a deal that would see them buy the entire shareholdings for Ireland-based Avolon. The due diligence is expected to wrap up in September or October, at which time CIC, China's sovereign wealth fund, and AVIC, a leading aviation company, would announce whether or not they will proceed.
Under their potential bid, CIC would be a purely financial investor and take a 40-45 percent stake in Avolon. AVIC's investment arm would hold the remaining majority stake, and would oversee Avolon's operations. The level of detail in the report, which cites an unnamed source with knowledge of the situation, seems to further support the possibility that talks are really happening.
Such a deal would also be consistent with China's much broader goal of playing a bigger part in the global aviation industry. The country is currently one of the biggest buyers of aircraft, as its airlines rapidly expand capacity to cater to the nation's millions of affluent business and leisure travelers. It is also currently developing a large commercial aircraft that it hopes will become a rival to models in a market now dominated by the western pair of Boeing (NYSE: BA) and Airbus (OTCPK:EADSY).
Such a deal would also come about a year after another Chinese consortium made a bid to buy a majority stake of International Leasing Finance Corp (ILFC), the world's largest aircraft leasing company that was being shopped by US insurance giant AIG (NYSE: AIG). But that deal, whose bidders reportedly included banking giant ICBC (HKEx: 1398; Shanghai: 601398) and valued ILFC at $4.8 billion, ultimately fell apart for reasons that were never disclosed. (previous post)
I suspect that politics may have been a factor in the ILFC deal's collapse, since many of the company's biggest customers are US airlines and Washington may have balked at the company's sale to a Chinese buyer. But the bigger factor was probably inexperience, since the buyer group reportedly consisted of companies with little or no experience in such major acquisitions.
The big difference in prices looks a bit suspicious in this latest case involving Avolon, since the reported $16 billion price tag is 3 times the value of ILFC in that deal. But it's possible the Avolon price includes factors like assumed debt, which presumably would be quite large for the owner of so many airplanes. This particular deal could have a better chance of success if it's really happening, since CIC and AVIC are larger companies with more experience in this kind of major transaction. So we'll just have to wait and see if the pair make a formal offer once they complete their due diligence.
Bottom line: A report of a China bid for Irish aircraft leasing company Avolon is probably correct, and could stand a better chance of success than a previous failed bid for US rival ILFC.