Sumitomo Mitsui pays $7.3 billion for RBS Aviation Capital

Late on Monday, Sumitomo Mitsui Banking Corporation (SMBC), acting for a consortium led by its parent Sumitomo Mitsui Financial Group (SMFG) agreed to pay £4.7 billion ($7.3 billion) for Royal Bank of Scotland’s aircraft leasing business, RBS Aviation Capital.

During the past few months, SMFG has had to fight off rival bidders, which included China Development Bank and Wells Fargo. Price and ability to complete the transaction are believed to be the main reasons for the Japanese bank’s victory.

The price includes future order commitments of $3.7 billion, and the sale is expected to be completed before the end of the third quarter this year. The deal is the biggest overseas takeover by a Japanese bank since 1999, according to Bloomberg data.

The consortium intends to explore long-term funding for the acquisition, including from export credit agencies and government-affiliated financial institutions from various countries, such as the Japan Bank for International Cooperation, “in light of the current uncertain financial climate”, it said in a statement yesterday.

Barclays, which together with Sumitomo Mitsui’s in-house unit Nikko advised SMFG, was unable to say how the consortium would finance the purchase in the short-term.

Barclays has been pushing hard in recent months to gain traction in the Japanese M&A business, with a focus on cross-border deals. In December, it advised Fujifilm on its $995 million purchase of Washington-based SonoSite, a major supplier of ultrasound medical products; and in the same month Barclays advised Unison Capital on a ¥40 billion ($520 million) two-step tender offer for Japanese autoparts maker, Asahi Tec.

Sumitomo Mitsui Finance and Leasing Company (SMFL) and SMBC, both subsidiaries of SMFG, set up SMFL Aircraft Capital Corporation in December 2008 to launch and develop an aircraft leasing business, which will be the main investor in the RBS business. SMFG will eventually have 50% to 60% ownership with the remaining 30% to 40% to be held by the Sumitomo Corporation.

Sumitomo says that demand for commercial aircraft will expand steadily, underpinned by increased passenger volumes in emerging markets, especially in Asia, and the rapid growth of low-cost carriers (LCCs).

“The acquisition of RBS’s aircraft leasing unit, the fourth-largest player in the world in terms of book value, will enable SMFG and [Sumitomo Corporation] to further expand and develop the business in Asia and other emerging markets as the new unit cooperates with the existing aircraft leasing unit,” said the statement.

RBS Aviation Capital currently owns 206 aircraft and has commitments to buy a further 87 by 2015. Clients include British Airways, Qantas and EasyJet.

As of June 30, 2011, it had gross assets of $7.2 billion and earned (unaudited) profits of $89 million during the six-month period to that date. The risk-weighted assets associated with the aviation capital business are $2.5 billion, according to a statement released by RBS on Monday.

But it was designated a non-core business of the UK bank in February 2009 after a strategic review that set the banking group on a deleveraging path to strengthen its balance sheet, reduce its wholesale funding requirements and concentrate its operational focus.

“This transaction further evidences our progress in reducing our non-core portfolio and returning the group to a position of strength,” said Bruce Van Saun, RBS's group finance director.

RBS Aviation Capital was set up in 2001, when it bought an aircraft finance operation called International Aviation Management Group. It employs 69 leasing specialists in its Dublin headquarters and eight other locations in Asia, Europe and the US. The management team and staff of RBS Aviation Capital are expected to remain with the business.

The sale by RBS, which was advised by Goldman Sachs, is its biggest disposal since the bank’s £45.5 billion bailout by the UK government in 2008.

Subsequent disposals have reduced RBS’s non-core assets to below $100 billion. Last week, the Edinburgh-based lender said it would close or sell its cash equities, mergers advisory, corporate broking and equity capital markets operations. It has also announced it will make more than 4,000 job cuts.