It's been several months since the saga that is American International Group's (AIG +5.31%) 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.
