AIG Should Just Cut Its Losses Already

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It's been several months since the saga that is American International Group's (NYSE: AIG  ) sale of its International Leasing Finance Corporation began to run into trouble. The latest news surrounding the transaction indicates that there may be more complications ahead. Since the insurance behemoth has been preparing for an IPO of ILFC on the side, it's about time that the company just cut ties with the failing sale and move forward.

A quick recap
Since the company's near-meltdown in 2008, it has been divesting itself of non-core business operations -- and ILFC is its last remaining piece to be sold. Though the company was originally seeking a much higher price for the world's second-largest aircraft leasing business, a Chinese consortium agreed to buy 80% of ILFC for $4.2 billion in December of last year.

But since the deal was inked, there have been numerous setbacks, mainly caused by missed deadlines set forth in the sales contract and by renegotiation. But this summer, the consortium took a blow when one of the biggest members, New China Trust Co., pulled out of the group in May. Since that time, the group has been searching for both new members and financing.

A complicated web
New information on the deal seems to show that the consortium has found both items it was seeking, with Taiwanese mogul Richard Tsai and Chinese financier Xiao Jianhua in talks with the group to participate in the sale. As the son of Taiwan's second-richest man, as well as a limited partner of the consortium's leader, P3 Investments, Tsai and the companies that his family owns would reportedly take a majority stake in the aircraft leasing business, while Xiao would simply provide financing. Though this would greatly help the group reach the finish line for the deal, the new players may create some new complications that could kill the sale altogether.

One of the deal's hangups may come from the Committee on Foreign Investment's approval of the sale to the consortium. Sources close to the deal have said that the committee would withhold approval unless there is no majority stakeholder among the participants. With the addition of Tsai and his family's companies to the group, this hurdle may trip up the whole transaction.

Death knell?
Though there are more groups that have expressed interest in joining the consortium, the latest development should not induce a sense of confidence in AIG's investors. The deal was originally slated to close during the second quarter of 2013, and now we're already through half of the fourth. With so many shortfalls already, CEO Robert Benmosche and his cohorts shouldn't have a hard time deciding the next step. As he stated in the third quarter's earnings conference call, the company hoped to have a decision made during the fourth quarter in regards to whether the sale or the IPO would move forward.

Understanding that the deal with the consortium is difficult because of the number of participants, there have been way too many holdups to date. With ILFC representing the majority of debt that AIG still holds, the divestiture is still essential for the company. It may take a little longer with the IPO, depending on the percentage AIG would offer to the market initially, but that route may end up more profitable for the firm -- and, ultimately, investors.

So far in 2013, it's been a successful year for IPOs. With 152 IPOs through the first three quarters, investors are seeing the highest level of activity since the tech bubble. And the average return of the US IPO index during the third quarter was upwards of 30% according to Renaissance Capital.

Moving on
Neither option for ILFC's sale is particularly easy or neat, but AIG needs to cut its losses and move forward already. By allowing the consortium more time, the insurer has just muddled up the picture for investors, who aren't sure which way the company will go. With the divestiture of ILFC representing its last piece of unwanted operations, AIG needs to make a swift decision and refocus investors' attention to the true business at hand -- insurance.

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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On November 20, 2013, at 4:51 PM, traderyen96 wrote:

    Could some one comment on the accoutning treatment of the pending sale? In the latest earnings call transcript Benmosche commented that the recent write down of ILFC boook value would not impact AIG's book value as it had been declared a non- core asset but that some thing had be done by the end of the year?

    The way I understood it was that he was saying that for accounting purposes aIG needed to have a deal by the end of the year?

    Any clarification would be appreciated.

  • Report this Comment On November 20, 2013, at 6:10 PM, ferdiefor wrote:

    If this consortium cannot get their act together in the near term they can purchase a large position in the IPO and then decide over time whether they want to take out ILFC in total.

    The problem is they are holding AIG back. It is my understanding these monies from ILFC were to go into a stock buyback. AIG did a stock buyback with other funds. I would like to see ILFC IPO now and announce another stock buyback with proceeds as originally planned.

  • Report this Comment On November 21, 2013, at 3:34 PM, XMFHarleyQuinn wrote:


    There are a couple things at play (accounting-wise) in the ILFC deal.

    First, the impairment charge for the operations' jets will not hit AIG's books because 1) ILFC is considered an asset-held-for-sale and 2) the company already took a write-down for the lowered sales price -- they had originally been seeking close to $8-9 billion.

    Second, since IFLC has been classified as an asset held for sale for close to 12 months, the accounting rules need to be looked at again. There a generally three requirements in order to classify an asset as held-for-sale: 1) it's available for immediate sale, as-is; 2) there is a market for the asset, with appropriate pricing, etc.; and 3) since it will be classified as a current asset, the sale needs to take place within 12 months, which is the time-frame that defines "current."

    David Herzog (CFO) stated during the conference call that ILFC would not come back onto AIG's balance sheet, which makes me believe that the company will have to make a decision this quarter to keep in line with the third requirement.

    I hope this helps. Thanks for reading!


  • Report this Comment On November 21, 2013, at 4:23 PM, traderyen96 wrote:

    Many thanks Jessica!! I think that Benmosche has tried his best to help the Chinese consortium, probably because AIG is trying to build their China business. Also there is the matter of the deposit that the group put up - does AIG keep it or do they give it back if they do an IPO? It appears to be a delicate situation but after a year, I hope that something is resolved.

  • Report this Comment On November 21, 2013, at 5:49 PM, XMFHarleyQuinn wrote:

    Management was very cryptic when asked about the deposit during the second quarter's earnings call. Though I don't know the specifics of the sales agreement, generally a deposit is "good faith" money put up front that the buyer would forfeit if the transaction doesn't close, but it would depend on why the sale failed. My guess would be that AIG keeps the money if the consortium can't get itself together. But if AIG backs out it's a toss-up on whether it keeps the funds -- if the terms are favorable to the buyers, they would have to claim some sort of breach by the consortium as the reason for their withdrawal.

    I agree that AIG is probably bending over backwards in order to keep in good terms with the Chinese as they build up their business there, but like you I hope that the issue is resolved shortly.

    Thanks again for reading!


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