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Bohai's Acquisition Of Avolon Likely Accelerate Its Growth Momentum

|About: Avolon Holdings (AVOL)

Summary

Avolon has been growing fast in Europe and North American aircraft leasing market.

The Chinese aviation industry is going through a rapid growth cycle and HNA Group owns one of the airlines in China.

Boeing says there would be a demand for 6,000 new aircraft in China in the next 20 years.

The acquisition of Avolon by HNA Group backed Bohai Leasing would help it to tap into the Chinese aviation market.

Company Overview

Founded in 2010, the US based Avolon Holdings Limited (NYSE:AVOL) is a holding company which operates via its wholly owned subsidiary, Avolon S.A R.L. ((Avolon)). Avolon is an aircraft leasing and lease management service provider to various airlines with global operations.

Since inception, Avolon has built a leading aircraft leasing platform in the lease management industry. Its main operation includes acquiring, managing and selling commercial aircrafts. Avolon's aircraft includes a total 259 aircraft, including 122 owned by the company, 12 managed and 93 other committed aircrafts.

Avolon's own fleet mainly includes Airbus A320 family and the Boeing 737-800 aircrafts. However, there are few widebody aircrafts as well, including Airbus A330, the Boeing 777 and the Boeing 787. The committed portfolio of the company includes 66 next generation Airbus A320neo, Boeing 737 MAX, Airbus A330neo, and Boeing 787 family of aircraft.

Avolon's experienced management has expanded its operation in 33 countries across the world and currently serves 56 airlines.

Summer Bidding War

Over this summer, Avolon investors found themselves lucky that the company has been the subject of a bidding war. Cayman Island based Global Aviation Leasing Co., Ltd. first offered to buy 20% stake in Avolon for $26 per share in July 2015 at a 14.5% premium compared to the market price at that time.

China based aviation and shipping conglomerate HNA Group is the largest stockholder of Bohai Leasing Co., Ltd., which owns the Global Aviation Leasing Co., Ltd. Hence, this $429 million offer was the HNA Group's largest acquisition offer since it acquired marine container leasing company SeaCo in 2011. A day after making the offer, by July 15, 2015, Bohai Leasing's stock price went up around 10% as investors realized how this deal would benefit the company.

After the bid from Bohai Leasing, Avolon received another private offer to sell the whole company at a price of $30 per share.

However, HNA Group has been trying to expand its market share in the aircraft leasing market, which is dominated by AerCap Holdings NV and GE Capital. In a statement, Bohai Leasing's CEO Chris Jin said that "Bohai will have a strong interest in benefiting from Avolon's profitable growth."

So, Bohai Leasing countered the $30 bid by terminating the tender offer of $26 per share for 20% of Avolon and offered $31 per share for the whole company instead.

On September 9, 2015, Avolon announced that it has reached an agreement with Bohai Leasing to sell the company for $7.6 billion at the price of $31 per share. Compared to the July 13, 2015 market price of Avolon's stock, if this transaction is completed, this would pay Avolon investors a 31% premimum. However, Avolon's stock was already trading at around $28.7 on September 4, as secondary investors were anticipating that Avolon will ultimately accept a bid from either of the interested parties.

So far, some of the major stockholders of Avolon, including CVC Capital, Cinven, Oak Hill Capital and GIC, have told the media that they would approve the deal with Bohai Leasing.

Chinese Airlines are Looking for Growth in the Global Market

The local aircraft market in China is somewhat saturated and the recent market crash made investors worried about medium term domestic growth prospects. China's state owned banks have been backing several Chinese carriers, including Hainan Airlines Co Ltd, Air China Ltd, China Eastern Airlines Corp Ltd and China Southern Airlines Co Ltd. These airlines have expanded their operation and added new overseas routes in the recent years.

With the acquisition of Avolon, Bohai Leasing has the opportunity to create a synergy for HNA Group, as HNA Group also owns Hainan Airlines Co Ltd, one of the Chinese carriers that is heavily expanding its overseas routes and need more aircraft.

In addition, according to an estimate from Boeing, the expanding Chinese airlines will need to acquire around 6,000 new aircraft over the next two decades and HNA Group would be in an interesting position to capture this growth momentum with Bohai Leasing's acquisition of Avolon.

Avolon Would Be Better Off under HNA Group

While Avolon has been very successful in Europe and acquired several expanding airlines as customers like Air France KLM SA and Ryanair Holdings PLC, the growth of the European market would likely lag behind the fast growing Asian market.

With Avolon under its wings, HNA Group would be in a better position to leverage the growth momentum in the expanding Chinese airline market. Besides getting exclusive contracts ((hopefully)) for offering leased aircraft to HNA Group's own airline, the Hainan Airlines Co Ltd., Bohai Leasing would also benefit from the conglomerate's strong presence in China and around the region.

Conclusion

Avolon's Chairman, Denis Nayden is right to say that the HNA Group backed acquisition would offer Bohai Leasing "one of the most compelling growth opportunities in global aviation over the next two decades." We hope he knows about the Boeing's projection and made the remarks based on that.

Avolon's board has till September 18, 2015 to finalize the deal and regulatory authorities have to approve the transaction as well. However, investors should expect the deal to complete by Q1'16.

Meanwhile, while this deal was on the table, Avolon has already continued its growth momentum, delivering a new Boeing 737-800 to Aeromexico and a new A320-200 to VivaAerobus, another Mexican airline, in the last one week.

Given the great growth opportunity in the orient in 2016 and Avolon's strong growth momentum in Europe as well as in the North American market, we are very optimistic about Bohai Leasing's performance once the deal is finalized and the transaction is completed.

Since Bohai Leasing is listed on the Chinese A-Shares stock market, its stocks are only available for purchase by Chinese mainland citizens. However, Qualified Foreign Institutional Investors (QFII) in China would be able to buy Bohai Leasing's stocks and benefit from its upside potential in the coming years. For the rest of the Avolon's investors, their journey with this amazing company is likely to end around $31 per share.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.