September 30, 2019 / 8:17 AM / 23 days ago

Exclusive: Dubai Aerospace drops plans for big aircraft order, targets M&A deal

DUBAI (Reuters) - Dubai Aerospace Enterprise favors expanding its fleet via a takeover of a rival after the group was unable to agree on a major order from Airbus (AIR.PA) and Boeing (BA.N), its chief executive said.

FILE PHOTO: The Airbus logo is pictured at Blagnac near Toulouse, France, March 20, 2019. REUTERS/Regis Duvignau

DAE, which joined the top tier of aircraft lessors with the 2017 acquisition of Dublin-based AWAS, was interested in a near-record purchase of 400 jets from Airbus and Boeing.

“It is hard to see how DAE is able to find a way to accept the price and terms and conditions the OEMs (original equipment manufacturer) are offering,” CEO Firoz Tarapore told Reuters.

A pricing disagreement had been an issue when Tarapore told Reuters in May 2018 DAE was interested in the order. This has led to DAE pursuing other options to increase its portfolio.

Boeing declined to comment on customer discussions. Airbus could not be immediately reached for comment.

The order for 400 single-aisle aircraft would have been worth more than $40 billion at list prices, though discounts of at least 50 percent are common on large orders.

This would have given DAE a pipeline of jets ordered directly from manufacturers on par with its rivals, though the world's biggest planemakers are mostly sold out of their workhorse single-aisle jets until 2024. reut.rs/2nC29HQ

The long wait is not a concern for the Dubai state fund company which wants to double its portfolio to 800 jets within the next six to eight years.

But Tarapore said the difference between the order price and the rental available in the leasing market was “so large that it doesn’t make any sense to have any hope that the gap narrows in the near future.”

“If you are sold out for four years what is your incentive to sell the first unit of the fifth year at any price other than the absolute highest price you can charge for it?” Tarapore said.

DAE could revisit a direct order in two years time as manufacturers clear their backlog of deliveries, though for now terms were “completely mispriced,” Tarapore said.

Instead, the Dubai-headquartered firm will look at expanding through organic growth, including sale and leaseback deals with airlines, as well as a potential takeover of a large rival.

“I think that our DNA is more aligned with doing a large, inorganic transaction and to supplement an inorganic transaction with organic growth,” Tarapore said.

Tarapore said an ideal takeover target would have around 100 to 200 jets in its fleet and none on order, but there are few of these.

“Whatever we end up buying has to advance our strategic objectives. As long as it does that, the price for that can be easily contextualised. That does not mean we are going to pay an insane price. It just means that for the right asset we would be willing to pay the market price.”

DAE was set up in 2006 with the aim of becoming one of the world’s biggest aircraft lessors, but started cancelling orders in 2010 as funds dried up following Dubai’s debt crisis.

The 2017 acquisition of AWAS, the industry’s 10th-biggest firm at the time, tripled DAE’s portfolio to about 400 owned, managed and committed aircraft worth over $14 billion.

Last week, it announced it had received a mandate from a fund manager to source and manage a $1.4 billion portfolio of jets.

That mandate will focus on Airbus A320ceo and Boeing 737NG jets, sourced from outside DAE’s existing portfolio.

The company also plans to raise more than $500 million once it obtains credit ratings from agencies S&P and Moodys. DAE has an investment grade credit rating of BBB-(minus) by Fitch.

Part of this money will be used to cover a $500 million debt maturity in August 2020, Tarapore said.

Reporting by Alexander Cornwell. Editing by Jane Merriman

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