It's been over four years since American International Group (NYSE:AIG) started shopping around its International Lease Finance Corp. for sale. As yet another extension to the closing date of the current deal for the aircraft-leasing operations' sale draws closer, there are plenty of things for investors to consider. Should they be hopeful that the deal closes as-is, or is another option better in the long run?
As it stands
In December, AIG announced that it was working with a group of five Chinese firms to sell 80% of its stake in ILFC, the world's second-largest aircraft leasing business. But since then, four of the original members of the buyers consortium have either dropped out or denied participation in the sale for various reasons. Now, AIG and the remaining player have agreed to the third extension of deadlines for the sale: If the deal isn't inked by the end of September, then AIG will consider walking, according to insiders.
One of the reasons AIG may be willing to wait around for the consortium to get things together is its long-term plans for expansion in the People's Republic. Within the last nine months, AIG has invested heavily in the PICC Group to create a presence in the growing Chinese market. With 6%-plus growth annually, plus a growing middle class that is in need of financial products for the first time, China presents a solid expansion opportunity for the insurer -- and it's jumped in early.
The growing middle class is also shoring up demand for passenger travel within the country, so the purchase of ILFC was a logical opportunity for firms within China to expand the aviation sector. The purchase would also represent one of the largest acquisitions of a U.S. company by China.
The two factors combined -- AIG's plans for its future in China and growing demand for aircraft -- may put enough pressure on the insurer to keep the sale moving forward regardless of the musical chairs going on within the group of buyers.
Though the composition of the consortium created an innately complicated sale -- imagine trying to coordinate five Chinese firms with different ideas and get approval from Beijing -- AIG may be putting up with a little more stress than it really needs to.
When AIG initially set out to sell ILFC, it was looking to part with the operations for nearly $8 billion. But that figure was a bit high for the market and the current deal values the business at $4.25 billion. Since December, however, the market has improved, making it possible that AIG could get a better deal from another buyer. But if the Chinese consortium falls through, AIG might have an even better option for ILFC -- an IPO.
One of the huge reasons for getting rid of ILFC is to rid AIG of one of its last remaining non-core businesses, plus shedding another huge chunk of debt from the company's books. But instead of selling the leasing operations to a new buyer, AIG's management is ramping up for a cross-country road show in preparation for an ILFC IPO. The potential spinoff of ILFC might open up new opportunities for AIG investors to unlock value in the different operating segments. But we'll have to wait for another 33 days to know if this option is in the works.
AIG is firmly in spotlight for its sleeker, and profitable operations -- with or without ILFC. And though the current deal to sell the leasing segment may be on shaky ground, investors should know that management will take it in stride should the sale fall apart and get the IPO show rolling. Both options will provide investors with value, either through greater savings (via the sale) or new investment opportunities (via the IPO).