Treasury’s Profitable Exit is AIG’s Opportunity Loss

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A consortium of Chinese investors, both public and private, is purchasing an 80.1% stake in International Lease Finance Corp (ILFC), the aircraft leasing arm of American International Group (NYSE: AIG), for $4.2 billion. AIG plans to retain at least 10% of its stake in ILFC while the Chinese consortium will have the option for an additional investment that will increase its ownership to 90%. The transaction is expected to close by Q2-2013. The consortium includes New China Trust, China Aviation Industrial Fund and P3 Investments. Earlier, it was also announced that ICBC and New China Life Insurance might also join the deal, but since then Bloomberg  reported that neither of the two have any such plans.

This would be the biggest takeover by a Chinese company of an American firm, which makes 2012 the year of Chinese M&A of American assets. This comes just a few days after another Chinese business Wanxiang Group outbid Johnson Controls and Japan’s NEC for nearly complete ownership of the bankrupt U.S. battery manufacturer A123 Systems Inc.  The latter’s defense contracts will be taken over by an American company, the Illinois based Navitas Systems. These two deals involving A123 have been valued at approximately $260 million. Before that, in May-2012, China’s Wanda Group acquired the leading American theater operator AMC Entertainment for $2.6 billion.

However, the ILFC deal remains the biggest and most significant to date. The company has more than a 1,000 aircraft in its fleet and does business with almost every major airliner. The deal still requires the approval of regulators, but the business is not a strategic asset and is non-core to AIG, therefore approvals are very likely to come in the near future.

Both A123 systems and AIG have relied on government support to stay alive in the past. While AIG managed to stay afloat after billions were pumped into it, A123 Systems fell despite receiving millions. AIG has been disposing of its non-core assets to pay back its massive $182 billion bailout. The Treasury’s stock in AIG has been gradually reducing, from 77% in the beginning of the year to just 16% by the end of September, and is fully divested now.

On Dec. 11, it was revealed that the treasury planned to sell 234 million of its remaining shares in AIG for around $7.6 billion. The sale was completed within days. The Treasury and Federal Reserve ended making a profit of $22.7 billion over the bailout amount.

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>AIG</strong></p> </td> <td> <p><strong>AIA Group*</strong></p> </td> </tr> <tr> <td> <p><strong>Stock YTD</strong></p> </td> <td> <p><strong>+46.28%</strong></p> </td> <td> <p><strong>+30.30%</strong></p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>2.34</p> </td> <td> <p>31.35</p> </td> </tr> <tr> <td> <p><strong>EPS</strong></p> </td> <td> <p>14.53</p> </td> <td> <p>0.13</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p><strong>ROA</strong></p> </td> <td> <p>1.71%</p> </td> <td> <p>1.19%</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> <p>27.38%</p> </td> <td> <p>7.83%</p> </td> </tr> </tbody> </table>

* AIA Group Ltd

In another development, we now know that AIG is preparing to sell its 13.7% stake in AIA Group, which has significant representation in iShares MSCI Hong Kong Index Fund (NYSEMKT: EWH), for around $6.5 billion, which is a 6.3% discount from the share’s closing price on Friday, Dec. 14. AIA remains one of the most prized possessions of AIG in Asia, whose IPO generated more than $20 billion (2010) and is currently Asia’s third largest insurer. The block sale will be the second largest deal in Asia behind Vodafone’s $6.6 billion sale of its ownership in China Mobile.  In a similar move, struggling HSBC recently sold its stake in Ping An Insurance for $9.38 billion. With the booming Asian insurance sector, AIG will not have any shortage of buyers.  If anything, both of these sales represent a huge loss for both companies, having to divest themselves of prime assets in growth industries at exactly the wrong time.

It now looks like with the last of the U.S. Treasury’s stake sold into the market, AIG can begin acting like a normal company again.  The question is, however, will there be a business worth buying into after having to divest itself of its best assets to survive?  The tax breaks from deferred losses alone will put the company in a good place to rebuild their margins for the foreseeable future.  But, missing out on the boom in the biggest growth market in the industry makes AIG a dubious investment at best.


PeterPham8 has no position in any stocks mentioned. The Motley Fool recommends American International Group, Inc.. The Motley Fool owns shares of American International Group, Inc. and has the following options: Long Jan 2014 $25 Calls on American International Group, Inc.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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