Should AIG sell ILFC?
Share buybacks are usually given a positive reception on the Street, but when assets are sold to raise the funds, we also need to look at what’s being given up. In the case of ILFC, AIG would be giving up a large part of its investment in the aviation industry. However, the aviation industry is positioned well for global growth. The wave of U.S. airline mergers has helped bring stability to the industry, and the demand for travel and commerce in emerging markets will help further fuel the demand for aircraft.
ILFC rival Air Lease Corp (NYSE:AL) is expected to see substantial earnings growth over the next couple of years through a combination of demand and fleet growth. Consensus estimates for Air Lease Corp (NYSE:AL) at Capital IQ show earnings per share rising from $1.70 in 2013 to $2.74 in 2015. Ever since Steven Udvar-Hazy (yes, the same Udvar-Hazy who started ILFC) started Air Lease Corp (NYSE:AL), the company has been in a growth pattern. While continuing corporate growth is a major factor at work for increasing Air Lease earnings, ILFC could expand as well because of the nature of a larger aviation market.
Without ILFC, AIG would still maintain some exposure to the aviation industry through aviation insurance. But ILFC provides AIG a way to profit more directly from industry growth both domestically and in emerging markets.
Not your father’s AIG
Since the financial failings that left AIG on government life support, the insurer has been trying to rebuild itself as a leaner operation. AIG has shed units worldwide while all along wanting to sell ILFC. When a Chinese consortium offered $4.2 billion for ILFC, AIG was more than pleased. However, that deal now faces long odds as major backers have pulled out. If the deal ultimately fails, AIG has several options ahead of it. It could search for another buyer, hold onto ILFC for aviation industry exposure, or run an IPO of the company, as AIG CEO Robert Benmosche has previously mentioned. With all of these options open to AIG, it seems like the company is in a good position to get exactly the price that it wants for ILFC. And if it doesn’t get that price, the opportunity available to ILFC in the aircraft market could make the subsidiary a nice profit engine for shareholders if AIG hangs onto it.
The article AIG’s Big Sale: Aircraft Leasing, $4.2B OBO originally appeared on Fool.com is written by Alexander MacLennan.
Alexander MacLennan owns shares of some airlines that lease planes from Air Lease and ILFC. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: long January 2014 $25 calls on American International Group.
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