AIG (NYSE:AIG) has announced a deal to sell its aircraft leasing unit, International Lease Finance Corporation (ILFC), to AerCap Holdings N.V. for $5.4 billion.  AIG will receive $3 billion in cash and a 46% stake in AerCap, allowing the insurer to earn from the aircraft leasing business while focusing on its core insurance operations. AIG will also provide a $1 billion, five-year unsecured revolving credit facility to the company after the transaction closes next year. The net cash proceeds for the insurer will be around $2.4 billion, after settlement of intercompany loans. ((AIG Getting $5.4 Billion For Sale Of Aircraft Leasing Unit, Forbes, 16 December, 2013)) With a fleet of more than 1,300 aircraft, ILFC is the second biggest aircraft lessor in the world, behind General Electric (NYSE:GE). 
Following the government bailout in 2008, AIG has been trimming operations by divesting non-core operations including its international life insurance businesses like AIG Star Life Insurance Co., Ltd. and AIG Edison Life Insurance Company, which were sold to Prudential Financial (NYSE:PRU) in 2010. AIG also sold American Life Insurance Company (ALICO) to MetLife (NYSE:MET) for approximately $16.2 billion. Last year, the company announced that it would sell 90% of its stake in ILFC to an investor group comprising of New China Trust Co. Ltd., China Aviation Industrial Fund and P3 Investments Ltd.  However, the transaction did not go through as planned.
AIG has successfully turned around its operations since its $182 billion government bailout in 2008. The company has repaid the debt owed to the taxpayers and repurchased the stake held by the U.S. Treasury, which at one point reached 92% of AIG’s shares. In the third quarter of 2013, the insurer declared a quarterly dividend of 10 cents per share and authorized a $1 billion stock repurchase plan, the first such action since 2008.  We are using a modification of the dividend discount model (DDM) to arrive at a price estimate for AIG. In our model, we estimate the total income that can be returned to shareholders through dividends and share repurchases, and discount this value back to the present.
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We have updated our price estimate for AIG’s stock to $47, implying a discount of 5% to the current market price.
The aircraft leasing division reported pre-tax losses of $792 million and $1 billion in 2010 and 2011 respectively, primarily due to high impairment charges. The division accounted for just $4.5 billion of AIG’s $65 billion revenues in 2012, with an operating margin of 7%. Due to the agreement with the Chinese consortium last year, AIG classified the ILFC operations as discontinued operations with the associated assets and liabilities classified as held-for-sale. For the first nine months of 2013, AIG reported $3.3 billion in aircraft leasing revenue with an operating margin of 55%. However, these operating results did not include depreciation and amortization expenses as a result of the held-for-sale classification. The operating margin in the prior year period was around 7%. GE reported $5.3 billion in revenues from aviation services for the first nine months of 2013, with an operating margin of 20%.
As of September 30, 2013, AIG had $35 billion in flight equipment, net of accumulated depreciation. The total liabilities held for sale were around $25 billion, with $22 billion in long-term debt. The ILFC deal will allow AIG to shed this debt from its balance sheet. If the transaction goes through, AIG will also be able to earn income from its equity investment in AerCap. We will update our model once the transaction is completed.Notes:
- American International Group Inc : AIG Agrees to $5.4 Billion Deal to Sell International Lease Finance to AerCap Holdings, December 16, 2013 [↩]
- AIG sells aircraft leasing wing to focus on insurance, Reuters, December 16, 2013 [↩]
- AIG Announces Agreement to Sell up to 90 Percent of International Lease Finance Corporation (ILFC), 9th December, 2012 [↩]
- AIG Announces First Dividend Since 2008 as Profit Climbs, Bloomberg, August 1, 2013 [↩]