Late last year, American International Group (NYSE:AIG) reached a deal to sell its aircraft leasing unit to AerCap Holdings (NYSE:AER) for the equivalent of $5.4 billion. But AIG's stake in the aircraft leasing industry is not over, and what remains of the investment is very important for AIG shareholders.
As AIG tried to reorganize itself after taking billions in taxpayer dollars to stay afloat, the sale of non-core units became a key part of its strategy. Various units were sold worldwide, including the sale of a Japanese insurance company to Prudential Financial and the sales of AIG's shares of AIA.
But always near the top of the list to sell was International Lease Finance Corp (ILFC), AIG's massive aircraft leasing unit. Fellow bailout recipient Royal Bank of Scotland Group (NYSE:RBS) sold its own aircraft leasing unit to raise capital as well. Although RBS remains over 80% owned by the U.K. government today, the sale of RBS Aviation Capital helped to reduce the need for even more taxpayer money. However, until the AerCap deal, AIG could not attract a strong enough bid for ILFC and the unit remained one of few remaining large non-core assets.
The terms of the deal call for AIG to receive $3.0 billion in cash and approximately 98 million shares of AerCap for a value at the time of the deal of $5.4 billion. But due to increased expectations for AerCap post-deal, AerCap shares have moved over 80% higher from their levels as the deal became public. As a result, the AerCap shares AIG will receive are worth around $1.7 billion more than they were pre-deal.
Out of the deal, AIG got $3 billion in cash and what amounts to a 46% stake in AerCap. Some investors may view this as a trade of one form of aircraft leasing ownership for another but it does carry some advantages.
First, AerCap shares are far more liquid than whole ownership of ILFC. Although there is a lockup period that expires in stages over the next 9 to 15 months, AIG can more easily sell AerCap shares after that than it could sell ILFC.
Second, ILFC carried around $21 billion in net debt with it. While this is acceptable for a high capital company (such as an aircraft leasing business), AIG would rather not have such a large amount of debt within the company. By selling ILFC to AerCap, AerCap assumes the debt and it's removed from AIG.
Third, turning some of its aircraft leasing business into cash allows AIG to pursue other initiatives. With shares trading well below book value, AIG is in a better position to increase share buybacks.
Aside from the benefits listed above, AIG still can benefit from further share price increases in AerCap shares. With the insurance giant committed to holding some shares for at least the next 15 months, AIG can benefit from analysts further warming to the economies of scale available at AerCap.
If AIG holds these shares longer-term, they could appreciate even more. In a Dec. 16 investment presentation, AerCap suggested the company could have run-rate pro forma earnings of over $4.00 per share. With a 15 times price to earnings ratio, a level closer to the S&P 500, this would put AerCap shares around $60, an increase of about 50% from current levels.
AIG has undergone dramatic changes since its disastrous 2008 performance. Shedding non-core assets, AIG has repaid its government loans and returned to private ownership. The sale of ILFC marks the latest step in the divestment of non-core assets but still allows AIG to benefit from aircraft leasing.
With healthier airlines and growing demand, aircraft leasing earnings look poised to grow. For these reasons, AIG should be glad it still has a position in aircraft leasing.