Quick update on Avolon (AVOL)

Avolon (AVOL), an Ireland-based aircraft lessor, has been one of my core positions on the long side for the last six months or so. You can read my original thesis and follow-up here (for those with Seeking Alpha Pro access); for those without, AVOL was basically an under-covered, cheap name in a secular growth sector (aircraft leasing) with temporary obscurity a function of recent IPO, private equity ownership overhang, and investor lethargy. Not only was it cheap but it possessed the newest fleet in the industry, had demonstrated an ability to profitably trade aircraft on the side, and had articulated an aggressive but realistic growth plan for the next couple years.



That’s the background; AVOL stock was at $20 about 6months ago, and had trundled along, doing pretty well but not spectacularly, rallying to ~$24 by July. However, the situation has gotten considerably more exciting in the last few weeks. Firstly a Chinese leasing company, Bohai, reached an agreement to buy 20% of AVOL at $26/share via tender offer (a premium to the then-stock price of ~$24).

This drew out other bidders, and AVOL announced today both that a) a third-party (strategic) buyer bid $30/share; and b) Bohai responded quickly to top that new offer by bidding $31/share for the whole company. AVOL remains in negotiations with both parties, and it clearly seems the company is ‘in play.’

Clearly a takeout is not something I expected in my original thesis, but we can file it under that joyous category of ‘good things happen to cheap stocks’. Even at $31/share, AVOL trades at ~10-11x my estimate for FY15 adjusted EPS, and ~9x FY16. The P/B metric looks a little high at ~1.5x vs sector comps, but adjusted for the embedded fleet value, its more like 1.2x (vs comps in the 1-1.15x range). Buyers appear quite willing to pay a premium for AVOL’s best-in-class fleet (in age and aircraft mix terms), attractively-priced order book, and track record of successful execution – aspects of the name that were originally discounted by the market, but I speculated could command a premium valuation. Size plays a factor too: AVOL remains one of the smaller names in the space, so an easier bite to swallow for foreign strategics than one of the much larger names like Air Lease (AER) or Aercap (AER).

While I would have been happy with $28 to exit a position I put on at $20, clearly in an acquisition scenario the multiples should be a bit higher and already some analysts think there could be a bit of a bidding war here. Clearly there are at least two motivated buyers, and AVOL’s initial reaction suggests they are willing to sell the company – just at the right price after an active negotiation. I view anti-trust/regulatory risk as minimal given AVOL is not a large player globally, is based in Ireland (historically a decent geography for inbound acquisitions) and is not systematic to any single country in any meaningful way. Financial risk on the bids would be something to consider once a formal bid/merger agreement is announced, however.

I would take profits on the trade in the $31-32 range, if we get there.

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