AIG Seen Reaping Extra $2 Billion on ILFC on AerCap Surge

American International Group Inc. (AIG) stands to get an extra $2 billion from the cash-and-stock sale of its plane-leasing unit after acquirer AerCap Holdings NV (AER) almost doubled in New York trading.

AerCap has jumped since agreeing in December to buy AIG’s International Lease Finance Corp. for 97.6 million shares and $3 billion in cash. Based on yesterday’s closing price of $47.52, the equity portion of the deal is valued at $4.6 billion, compared with $2.4 billion when the transaction was announced. That adds to the potential proceeds for New York-based AIG five months after the AerCap deal replaced a failed all-cash sale of ILFC to a group of Chinese investors.

“This was an asset that no one thought they could sell,” said Josh Stirling, an analyst at Sanford C. Bernstein & Co. “They did sell it. They’re making $2 billion more.”

AIG Chief Executive Officer Robert Benmosche said last week that the company will evaluate its plans for using the funds after the ILFC sale is completed. Cash will probably be used to repurchase shares this year, said Charles Sebaski, an analyst at BMO Capital Markets.

“I don’t see that there’s any other need for cash in the business,” he said by phone.

AIG faces restrictions on selling the 46 percent stake that it will hold in Schipol, Netherlands-based AerCap after the deal closes. The insurer can sell a third of its stock nine months after the transaction is completed, two-thirds after a year, and the rest three months later.

Stock Fluctuations

Fluctuations in the shares of AerCap and AIG may affect how the insurer deploys its funds, Sebaski said. If AIG’s shares still trade below book value, the insurer will probably favor buybacks. If the shares rally, dividends may become more attractive, he said.

“It’s a little early to get too excited,” Sebaski said. Because the stake is so large, “they can’t turn around and sell it at market price.”

The combination of AerCap and ILFC creates an aircraft lessor that will rival General Electric Co.’s unit as the largest in the industry.

“AerCap is poised to become one of the two premier global aircraft leasing franchises by month’s end with the closing of the ILFC transaction,” Gary Liebowitz, a New York-based aerospace analyst with Wells Fargo & Co., wrote in a May 7 research note.

The firm will gain ILFC’s $21 billion order backlog and an aircraft fleet with a carrying value of $32.1 billion as of March 31, Liebowitz said. AerCap is buying the planes at “unambiguously below-market prices,” he said.

Global Growth

AerCap and its rivals are benefiting from global growth in air travel and airline demand for newer, more fuel-efficient jetliners. The resurgence helped ILFC earn pretax income of $192 million during the first quarter of 2014, its highest quarterly profit since 2009, Liebowitz said.

Market conditions also favor AerCap’s plans to liquidate some of ILFC’s older planes, Liebowitz said.

AIG and AerCap said in separate filings on May 5 that they had received all regulatory approvals for the deal. A spokeswoman for AerCap declined to comment. Jon Diat, an AIG spokesman, said the deal is scheduled to close in the current quarter. He declined to say what AIG will do with the proceeds.

AIG is selling ILFC to narrow its focus on property-casualty coverage and life insurance. The deal lets AIG separate itself from more than $20 billion in debt at the plane business.

AIG’s Ownership

AIG paid $1.16 billion for ILFC in 1990, data compiled by Bloomberg show. Under AIG’s ownership, the unit originally benefited from the ability to borrow money at low rates, an advantage that evaporated when the insurer was hobbled by losses tied to subprime mortgages.

AIG repurchased $867 million of shares in the first quarter, and $405 million in the final three months of last year.

After the sale, AIG will reevaluate its capital plan, Benmosche said on a conference call with analysts this month. Executives are taking into account the Federal Reserve’s supervision as the insurer crafts its plans, he said.

“Our approach to capital management has been consistent, steady, orderly,” Chief Financial Officer David Herzog said on the call. “We’re moving at an appropriate pace given the environment.”

To contact the reporters on this story: Julie Johnsson in Chicago at jjohnsson@bloomberg.net; Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net; Ed Dufner at edufner@bloomberg.net Dan Reichl

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