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Since its 2008 collapse, American International Group (NYSE: AIG ) has established a strategy of selling off non-core assets. However, it hasn't all been easy. But recent reports give some more hope that AIG may be able to unload a very large non-core asset in the near future.
Insurance and aircraft leasing
Near the top of the list of non-core assets to divest was AIG's aircraft-leasing subsidiary International Lease Finance Corp (ILFC). With more than 1,000 aircraft, and relationships with more than 200 airlines, ILFC is a major player in aircraft leasing.
However, the idea of large financial companies owning aircraft-leasing units is not that uncommon. In an effort to raise additional capital, Royal Bank of Scotland Group (NYSE: RBS ) sold off its plane-leasing subsidiary RBS Aviation Capital to Sumitomo Mitsui Financial Group for approximately $7.3 billion. Despite this capital raise, RBS is still owned 81% by the British government, but this raise was a good alternative to more share dilution.
Last year, AIG reached a deal with a Chinese consortium to sell up to a 90% stake in ILFC. But by the middle of this year, this deal looked increasingly unlikely to be completed, as a major financier of the deal backed out.
The latest reports give some hope to this deal though. P3 Investments and Fubon Group are closer to lining up $2.1 billion in financing to support the deal. The current plan now calls for ILFC to eventually be divided, so that the consortium receives 74.5% of the company, AIG retains 17.5%, and ILFC employees together hold the remaining 8%.
What it means
AIG has been on a long journey of reshaping the insurance giant that became the poster child for Wall Street excess. In many ways, the divestment of ILFC would mark another step along the path of selling non-core assets. And considering ILFC was near the top of the list of things to sell after the bailout, the final sale of the aircraft leasing company would be seen as a major positive for those investing in AIG for its insurance operations.
Furthermore, the cash raised from the sale of ILFC could support additional share buybacks. With shares trading at less than book value, share buybacks could be a great way to increase book value and boost shareholder value.
This cash infusion may also put AIG in a position where it views itself as more financially stable, leaving room open for a dividend increase. An increase from its current sub-1% yield to the 2% to 3% range closer to peers would make AIG shares more attractive to income investors, and remove a negative to investing in AIG stock versus its peers.
While the deal to sell ILFC looks closer than before, it is not yet a done deal. However, despite ILFC being a non-core asset, it still could have significant value for AIG if it's not sold.
The aircraft-leasing market looks set up to have a bright future as emerging markets create more demand for air travel, and more stable airlines make for less volatile industry. Although it's tougher to get widespread analyst coverage on ILFC due to it not being publicly traded, rival aircraft leasing company Air Lease (NYSE: AL ) looks positioned to rise in this market. Earnings projections call for earnings to rise from $1.52 per share in 2012, to $1.79 in 2013, before increasing again to $2.32 for 2014.
With a worldwide presence, hundreds of aircraft, and relationships with a diverse basket of airlines, Air Lease would be a good pure play investment for those bullish on air travel demand. Air lease even pays a dividend but, like AIG's, it's a small one of less than 1%.
AIG is now closer to completing yet another part of its long-term restructuring. With the investment group having sent the terms sheet for a $2.1 billion loan to lenders, there is now more hope that the sale of ILFC could be completed.
But even if AIG cannot sell ILFC, the outlook for the aircraft-leasing industry is positive. This should prevent ILFC from becoming a major drain on AIG's finances, and even attract a higher valuation if AIG decides to run an IPO of the aircraft leasing company. I would view AIG shares as having some upside if the sale is completed, but having limited downside in the event of its failure. Investors bullish on the prospects of ILFC should see if AIG fits with their investment strategy.
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