China’s Aircraft Leasing Buy From AIG Unravels
Media are buzzing with word that the blockbuster but controversial sale of the world’s top aircraft leasing firm to a Chinese buyer may be unraveling, after the Chinese group missed a payment in the deal process. Word of the missed payment is coming from the seller, AIG (NYSE: AIG), and may be the first sign that the US insurance giant either no longer wants to sell its ILFC unit or perhaps has found another, less controversial buyer willing to pay a similar price for the aircraft leasing company.
Before we look at the latest news, let’s backtrack quickly and review the steps leading up to the latest wrinkle in this controversial deal. AIG first announced the plan to sell its International Lease Finance Corp (ILFC) back in December, with the Chinese buyer group set to pay $4.8 billion for 90 percent of the unit. (previous post) The deal drew surprisingly little criticism from US politicians and other industry groups, perhaps because the US presidential elections had already passed and also because ILFC counts Chinese airlines as some of its biggest customers.
The story went mostly quiet after that, but returned briefly to the headlines last month when AIG announced the 2 sides had agreed to a one-month extension for finalizing the deal to June 14. (previous post) No further explanation was given, but now it appears that perhaps the extension was given to allow the Chinese buyer group to make an initial payment for the purchase.
Now the latest reports are saying the Chinese side has failed to make that payment by a required deadline, giving AIG the right to terminate the sale. (English article; Chinese article) A Chinese newspaper contacted the chairman of one member from the buyer group, New China Trust Co, who wouldn’t comment directly on the missed payment. But he did say his group was aggressively working to move the deal move forward.
From my perspective, it looks like several things are happening here. At the most immediate level, the Chinese group’s failure to make the payment reflects the complexity of this deal and also inexperience by Chinese firms in general at this kind of major global M&A. At the same time, AIG may be preparing to take advantage of the Chinese group’s inexperience and use the missed payment as an excuse to officially cancel the deal.
In the half year since the deal was first announced, several things have happened that may have changed AIG’s attitude towards the sale. Perhaps most importantly, the US Treasury Department sold its remaining shares of AIG in December, formally ending its $182 billion bailout of the company at the height of the global financial crisis in 2008. AIG had sold off numerous global assets to help repay its debt to the US government, and the ILFC sale was initially part of that drive. But with the bailout no longer relevant, AIG may be rethinking its decision to sell the unit.
At the same time, other potential buyers may have also emerged in the last 6 months since the original deal was announced. Such buyers, if they came from the US or other western countries, might look much more attractive to AIG for several reasons. From a financing perspective, such buyers would probably have more experience in such major M&A, and thus would have less difficulty paying for the deal. Such a buyer would also be less controversial that the Chinese group, which was likely to receive major scrutiny from Washington.
At the end of the day, I suspect we could see AIG announce its official termination of this sensitive sale in the next week or two, even as the Chinese buyer group tries to salvage the deal. Such a development would be slightly disappointing for global free trade advocates. But it also will come as a relief to Washington, which would have faced a difficult decision if the 2 sides had moved ahead with the sale.
Bottom line: AIG is likely to cancel the planned sale of its ILFC aircraft leasing unit to a Chinese buyer group, after the group missed a deposit payment deadline.
Related postings:
This article was first published in the online edition of the South China Morning Post at www.scmp.com.
