Insurance giant American International Group Inc. announced it would sell a majority of its Century City aircraft-leasing unit to Netherlands-based AerCap Holdings, in a deal valued at $5.4 billion in cash and stock.
The deal for International Lease Finance Corp. still faces substantial regulatory hurdles, including U.S. and foreign reviews. If approved, the deal is expected to close by the second quarter of next year.
AIG has been trying to sell the unit since 2008, when it nearly collapsed and was forced under federal government control. The government acquired a 92% stake in AIG, but has since sold the last of its stock in the company.
To repay the $182.5 billion bailout, AIG has sold off a series of non-core businesses.
The leasing unit, better known as ILFC, buys aircraft and rents them to airlines for a fixed period. With plush headquarters at Constellation Place, formerly known as MGM Tower, the company has business relationships with nearly every major airline around the globe.
"This transaction creates a strong foundation for ILFC and positions it for continued market leadership and strategic growth," Robert H. Benmosche, AIG's chief executive, said in a statement. "ILFC is a valuable business, and AIG has always taken great pride in ILFC's reputation for innovation, its pioneering role in aircraft leasing, its industry-leading team of employees, and its consistent and successful market leadership."
ILFC owns a fleet of 989 aircraft, which combined with AerCap's 373 planes would make the new company a formidable rival to industry leader GE Capital Aviation Service, which has a fleet of 1,700 aircraft.
Under the terms of the deal, AIG said it would get $3 billion in cash and about 97.6 million shares of AerCap Holdings — about 46% of AerCap's stock. AerCap would have control of the merged company.
AIG also agreed to provide a $1-billion, five-year unsecured revolving credit facility, which would be available when the deal closes.
AIG said it and ILFC are consulting with relevant U.S. regulatory agencies and intend to submit the deal for review by the Committee on Foreign Investment in the United States, which has considerable latitude in deciding which transactions to evaluate, and possibly the Federal Reserve Board of Governors.
Industry experts said they didn't see any apparent grounds for the U.S. government to reject the sale of ILFC, which has little in the way of sensitive technologies that would threaten U.S. competitiveness or national security.
"Any deal that helps consolidate the industry, especially one that involves a foreign buyer, will be complex and subject to review," said Tom Captain, aerospace analyst with the financial firm Deloitte.
The deal also needs approval of AerCap's shareholders.
AIG hopes it can close the deal this time. The company thought it had struck a deal for ILFC last December when it announced plans to sell an 80% stake to a consortium of Chinese investors for $4.2 billion. That deal failed after the bidders repeatedly missed deadlines.
Although the Chinese group was largely unknown in the aviation world, AerCap is an industry leader.
It has one of the youngest fleets, with an average age of 5.4 years, and a relatively small amount of debt, at $6.2 billion, as of Sept. 30. The company has its headquarters in Schiphol, Netherlands, with offices in Ireland, China, Singapore and the United Arab Emirates.
It's buying a long-established company that has nearly 1,000 owned and managed aircraft and commitments to purchase about 330 new aircraft. ILFC has about 200 customers in more than 80 countries.
"AerCap's acquisition of ILFC will create the leading global franchise in the aircraft leasing industry," Aengus Kelly, chief executive of AerCap, said in a statement. "We believe AerCap will now have the most attractive order book in the industry."
ILFC does have drawbacks, said Richard Aboulafia, an aerospace analyst with Teal Group Corp., a Virginia research firm. The company had $22.3 billion in total debt as of Sept. 30 and its fleet had an average age of 8.6 years.
That could be why AIG couldn't sell the company outright, instead selling only 54%, he said.
"It's the best AIG could do, considering the financial realities," Aboulafia said. "They bring a lot to the table, but they also bring a lot of debt."
If the deal closes, it would mark the end of AIG's 23-year ownership of ILFC. AIG bought ILFC in 1990 for $1.3 billion in a stock swap. The sale was beneficial for ILFC because it was able to leverage AIG's then-stellar credit ratings to access billions of dollars in short-term, lower-interest debt to buy planes.
But those benefits changed with the 2008 global financial crisis and AIG's receipt of bailout funds to avoid collapse. ILFC struggled to borrow money. That forced AIG to tap financing from the Federal Reserve Bank of New York in an arrangement set up during AIG's bailout.
The bailout placed restrictions on executive compensation, which caused a mass exodus of ILFC's management team.
The biggest blow came in February 2010, when company co-founder and then-Chief Executive Steven Udvar-Hazy abruptly left to start a rival business, Air Lease Corp., also based in Century City. That company went public a year later.
AIG had hinted for the last few years at wanting to sell ILFC back to Udvar-Hazy and others, but had been unable to close a deal.
In Monday trading, shares of AIG were up 56 cents, or 1.1%, to $50.29. AerCap's stock rose $8.24, or 33.05%, to $33.17.
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