NEW YORK/HONG KONG – American International Group Inc is to sell nearly all of ILFC , the world's second-largest airplane leasing business, to a Chinese consortium for up to $4.8 billion, giving the fastest growing aviation market easier and cheaper access to planes.
Chinese firms have shown interest in aircraft leasing before, and the deal would give China access to a global network of about 200 airlines in 80 countries. China is already ILFC's largest market with 180 planes operating there, giving it 35 percent market share.
"It's the biggest deal we have in the aircraft leasing world and it's very ambitious," said Paul Sheridan, head of Asia at aviation consultancy firm Ascend Advisor. "We believe there are not enough aircraft on order in China at the moment. It will help Chinese airlines get more aircraft."
The world's two largest planemakers - Airbus, owned by aerospace group EADS , and U.S. rival Boeing - have predicted demand for $4.5 trillion worth of passenger jets over the next two decades, with about two-thirds of new planes sold in the Asia-Pacific region, and China as the biggest single market in value terms.
Analysts say China tends to balance its orders between Airbus and Boeing, partly for political reasons. This means China pays an effective premium for planes as the two manufacturers don't have to compete as heavily for orders as they do elsewhere. ILFC's order books could mean cheaper planes for China, industry experts say.
U.S. insurer AIG, which had said on Friday it was in talks about a sale of the business to Chinese buyers, said it will submit the offer for review by the U.S. Committee on Foreign Investment, or CFIUS, which vets foreign deals for security concerns.
Chinese state-backed investments in some sectors have stirred a political backlash, but aircraft leasing is seen as less sensitive than investment in minerals or telecoms equipment. "ILFC's portfolio is not heavily in the U.S. It's an American-owned asset, but a lot of their aircraft fly outside the U.S," said Ascend's Sheridan, adding he did not expect the U.S. government agency to block the deal.
AIG received a $182 billion U.S. government bail-out following the global financial crisis, and has been selling off the bulk of its Asian operations as part of a wider divestment plan so it can repay the government. In September, the U.S. Treasury cut its AIG stake to below 16 percent of the outstanding shares from around 53.4 percent.
CHINA BUSY BUYERS
The Chinese consortium - made up of New China Trust, which is one-fifth owned by Barclays Plc , China Aviation Industrial Fund and P3 Investments Ltd, and advised by Credit Suisse - will buy 80.1 percent of ILFC for $4.23 billion, with the option to buy another 9.9 percent. An arm of Industrial and Commercial Bank of China <1398.HK>, China's biggest bank, will join once the deal has regulatory approval.
P3 Investments is led by Wing-Fai Ng, co-founder of the now defunct pan-Asia fund Primus Financial Holdings.
Founded by aircraft leasing legend Steven Udvar-Hazy, who sold the company to AIG in 1990, ILFC is among the world's biggest owners of passenger jets. Its main rival is GECAS, an arm of General Electric Co .
The deal reinforces China's appetite for outbound mergers and acquisitions, taking the country's 2012 tally to $56.8 billion, according to Thomson Reuters data, the biggest dealmaking spree since 2008.
In the past few days alone, Canada agreed to allow CNOOC <0883.HK> to buy domestic energy company Nexen Inc for $15.1 billion, and China's privately-owned Wanxiang Group won a politically sensitive auction for bankrupt electric car battery marker A123 Systems Inc , partly funded by the U.S. government.
WEAK MARKETS SAW OFF IPO
AIG had long wanted to float ILFC in the United States as part of a wider program to raise money to pay back the U.S. government, but poor market conditions shelved those plans.
The sale would leave AIG with a $6.4 billion stake in its former Asian life insurance unit AIA Group Ltd <1299.HK>, which is widely expected to be sold.
AIG said it would record a non-operating loss of $4.4 billion on the ILFC sale, including a charge for tax-related items. The deal, expected to close in the 2013 second quarter, values the leasing business at $5.28 billion, below its end-third quarter book value of $7.9 billion.
"Upon completion, the transaction will have a positive impact on AIG`s liquidity and credit profile and will enable us to continue to focus on our core insurance businesses," AIG CEO Robert Benmosche said in a statement.
AIG agreed to buy a $500 million stake in Chinese insurer PICC Group <1339.HK>, which made its debut on the Hong Kong stock exchange last week.
ILFC will retain its current management and continue to be based in Los Angeles. It will appoint a new board with a majority of U.S. and European representatives, AIG said.
In its near-four decades, ILFC has bought more than 1,500 passenger jets from Boeing and Airbus, and currently has a portfolio of more than 1,000 owned or managed aircraft. It has on order 239 new fuel-efficient planes, including Boeing 787s and Airbus A320neos, and has the rights to buy an additional 50 such aircraft.
ILFC, which has been looking to Asia Pacific to drive growth, had total assets of $39.6 billion and $39 million in operating income in the third quarter, compared with an operating loss of $1.3 billion a year earlier, when it took $1.5 billion in impairment charges and fair-value adjustments.
(Reporting by Ben Berkowitz in NEW YORK and Denny Thomas in HONG KONG; Additional reporting by Alison Leung in HONG KONG; Editing by Michael Flaherty, Richard Pullin and Ian Geoghegan)