IPO Analysis: Greenwich Kahala Aviation

by: IPOdesktop

Based in Dublin, Ireland, Greenwich Kahala Aviation (GKH) is scheduling a $180 million IPO at $15, with a market capitalization of $228 million for Friday, March 4, 2011. IPO Managers are FBR Capital Markets and Wells Fargo Securities. Co-managers are Cowen and Raymond James.

SUMMARY -- GKH is a blank check airplane leasing company with one airplane, targeting a niche market of older jets and turbojets. Stocks in the aviation leasing sector on average increased 32% in the last six months. For example, AerCap Holdings (NYSE:AER) +31%; Aircastle Limited (NYSE:AYR) +48%; and Fly Leasing Ltd (NYSE:FLY) +17%.

RPK Capital Management Group, a competitor of First Greenwich Kahala, recently announced a partnership with the Carlyle Group and a commitment of $600 million to acquire used commercial aircraft.

Valuation -- GKH wants to price at 40% premium over book value. The above established competitors sell for 80% to 100% of book value. Two of them already pay dividends: Fly Leasing Ltd pays 6% and Aircastle Limited pays 3.2%. GKH almost broke even in the December, 2010 quarter after losing $1.2mm for the nine months ended September, 2010.

GKH Valuation Metrics

9 to 12 MONTH OBJECTIVE -- GKH’s objective in the 9 to 12 months after the completion of this offering and the concurrent private placement is to acquire more than 25 aircraft. As of December 31, 2010, the total population of narrowbody jet aircraft types that fit GKH’s basic parameters is in excess of 8,000 units.

Emphasis will include Boeing (NYSE:BA) 737 Classics (previous generation of Boeing 737s, specifically the -300, -400 and -500 series), early build Boeing 737 NGs (current generation of Boeing 737s, which include the -600, -700, -800 and -900 series), Boeing 757s, Airbus A320s and McDonnell Douglas MD88s, as well as used turboprops from ATR and Bombardier and used regional jets from Embraer and Bombardier, which we refer to as our target assets.

40% IRR for a selected time period -- From December 2003 to April 2008 on page 93 in the February 16 S-1 filing, data shows a 40% Internal Rate of Return for aircraft for which First Greenwich Kahala acted as external advisor or manager, either alone or with joint venture partners, and that have been disposed of by the entities that First Greenwich Kahala and, if applicable, its joint venture partner, were advising.

These aircraft, all of which were not new at the time of acquisition, had an aggregate purchase price of approximately $186 million and an aggregate sales price of approximately $224 million. These aircraft were all manufactured between 1985 and 2000. Of these acquisitions, the SAS Boeing 737-400 acquisition was financed with 96% leverage and the Air Canada Airbus A320-211 acquisition was financed with 80% leverage; the other acquisitions were financed solely with equity.

-- The aircraft leasing industry is highly competitive, and although it is comprised of over 100 aircraft lessors, the top five lessors in terms of the number of aircraft owned control more than 50% of the total number of aircraft that are currently on lease.

Initially, GKH believes most of its primary competitors in the niche areas will be significantly larger, have a longer operating history and may have greater resources or lower cost of capital than ours; accordingly, they may be able to compete more effectively in one or more of the markets GKH attempts to enter.

Primary competitors include GE Capital Aviation Services Limited (GECAS), International Lease Finance Corporation, AerCap Holdings N.V., Aircastle Limited, Aviation Capital Group Corp., AWAS, Boeing Capital Corporation, CIT Group Inc., Macquarie Aircraft Leasing Services (U.S.) Inc., Royal Bank of Scotland Aviation Capital, Babcock & Brown Air Limited, Standard Chartered Bank’s Pembroke Group, and BOC Aviation Pte. Ltd. (formerly Singapore Aircraft Leasing Enterprise Pte. Ltd.).

However, many of these lessors focus on new or very young mainline jets, which have little overlap with GKH’s niche areas. Nordic Aviation Capital A/S is a competitor that focuses on the same aviation niches, although their primary focus is on regional jet aircraft and turboprops.

In addition, RPK Capital Management Group, a competitor of First Greenwich Kahala, recently announced a partnership with the Carlyle Group (OTC:CARYK) and a commitment of $600 million to acquire used commercial aircraft. While their focus overlaps with GKH’s, the RPK-Carlyle partnership investment strategy does not focus on turboprops or regional jets.

USE OF PROCEEDS -- $169 million
Pay ongoing operating expenses; acquire target assets, including the two aircraft under the letter agreements GKH expects to acquire on or immediately after the completion of this IPO concurrent private placement; repay a loan received from GK Hannover to purchase the first aircraft; and repurchase shares that were sold to founders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.