UPDATE 5-Chinese group buys AIG aircraft firm for up to $4.8 bln

Mon Dec 10, 2012 11:43am EST

* First tranche of 80.1 pct holding worth $4.23 bln

* AIG to record $4.4 bln loss on the sale

* ILFC deal will boost China outbound M&A to $56.8 bln in 2012

* Sale to face national security review

By Ben Berkowitz and Denny Thomas

NEW YORK/HONG KONG, Dec 10 (Reuters) - American International Group Inc will sell nearly all of aircraft leasing business ILFC to a Chinese consortium for up to $4.8 billion, in a deal that gives the fastest growing aviation market easier and cheaper access to planes.

But the sale is at a far cheaper price than AIG sought and will lead to a substantial loss, the insurer's price for getting out of its last major non-core asset following the U.S. government bailout of the company in the financial crisis.

Chinese firms have previously shown interest in aircraft leasing, 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 plane makers -- 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.

ILFC's order books could mean cheaper planes for China, industry experts say.

CHINA BUSY BUYERS

The Chinese consortium is made up of New China Trust, which is one-fifth owned by Barclays Plc ; China Aviation Industrial Fund; and P3 Investments Ltd; with outside advice provided by Credit Suisse

It 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, 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.

The deal reinforces China's appetite for foreign mergers and acquisitions, taking the country's 2012 tally to $56.8 billion, according to Thomson Reuters data, the biggest since 2008.

In the past few days alone, Canada agreed to allow CNOOC 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.

U.S. REVIEW

AIG, which had said on Friday it was in talks about a sale to Chinese buyers, will submit the offer for review by the Committee on Foreign Investment in the United States, or CFIUS, which vets foreign deals for security concerns.

In September, the U.S. Treasury cut its stake in AIG to below 16 percent of the outstanding shares from around 53.4 percent. It may have an awkward situation to address, though. Besides being AIG's largest shareholder, the Treasury also chairs CFIUS.

Chinese state-backed investments in some sectors have stirred a political backlash, but aircraft leasing is seen as less sensitive than natural resources 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 to block the deal.

If the deal is not approved and closed by May 15, 2013, either side will have the right to back out, AIG said in a regulatory filing on Monday. Citigroup acted as AIG's financial adviser on the deal.

LOW VALUATION

AIG received a $182 billion U.S. government bail-out following the global financial crisis, and has been selling off assets worldwide as part of a wider divestment plan. ILFC was considered the last major piece to be sold off.

AIG shares fell 1.6 percent to $33.59 in morning trading on the New York Stock Exchange. Analysts said it was a good deal for the company but nothing to inspire investors, given the loss AIG will record on the sale.

"We applaud this move, as it will reduce balance sheet leverage and enhances liquidity if consummated," S&P Capital IQ analyst Cathy Seifert said in a note to clients.

The company first filed for an initial public offering of ILFC in Sept. 2011, but market conditions since then made the IPO untenable. In selling ILFC directly, AIG is also accepting a far lower valuation that it had sought -- just two-thirds of book value, rather than the full book it had long wanted.

The deal, expected to close in the second quarter, values the leasing business at $5.28 billion, against its latest book value of $7.9 billion. Publicly traded peers Air Lease Corp and AerCap trade for 1.04 times book and 0.71 times book, respectively, according to Thomson Reuters data.

AIG said it would record a non-operating loss of $4.4 billion on the sale, including a charge for tax-related items.

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.

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. It 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 the rights to buy an additional 50 such aircraft.

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