Street Capitalist: Event Driven Value Investments

Most value investors have been watching American International Group (NYSE:AIG) closely. A year ago, the company was trading at nearly $70 per share, now it’s hovering around $12 and trading at around 50% book value. AIG’s current troubles are linked to what’s been happening over the course of the weekend. Like Lehman, AIG is one of the top credit default swap counter parties and its financial products group is directly tied to the well-being of the credit markets (a place not very well right now).

via Wake-Up Call: Lehman’s Mortgage Marks (WSJ)

The company is barely holding on to its EDIT:AA-minus rating and has now announced that they’ll commence a wide scale restructuring program to shore up capital.

AIG’s management team was scrambling on Sunday afternoon to cobble together the plan and present it to the insurer’s board for approval, the people said. The insurer, which has already raised $20 billion in fresh capital so far this year, was also in discussions with several private equity firms about a capital injection and hoped to raise more than $10 billion, the people said.

AIG considered selling or spinning off the aircraft-leasing arm — International Lease Finance Corp. — earlier this year but decided in June to keep it. Since then, AIG’s position has deteriorated, however, making a disposal more likely.

AIG Plans Major Restructuring, Sale of Aircraft-Leasing Business (WSJ)

The aircraft-leasing business, International Lease Financial Corp (ILFC) would be an awesome catch for Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A). Back in May, Steven Udvar-Hazy (ILFC’s founder) pushed for a split from AIG in fear of the effects of such a ratings downgrade. ILFC is a great business that has a large moat in its industry. Here is some background on ILFC:

He noted that the world airline industry had ordered more than 7,000 airplanes in the past three years, many of which could ultimately be financed through leasing. “With more than $250 billion worth of aircraft in the backlog, it’s important to be in a position to play a part in financing,” he said…

Mr. Udvar-Hazy’s status as a force in the aviation industry is owed largely to the fact that he pretty much invented ILFC’s leasing niche when he founded the company 35 years ago. Early on, he showed a willingness to take big risks. In an industry known for colossal failures and collapses, the Hungarian immigrant parlayed a $50,000 investment in 1973 into a personal fortune worth an estimated $3 billion. He did it in large part by driving hard bargains with airline customers and jet makers alike, say those who have dealt with him over the years.

Today, ILFC has a fleet of more than 900 airplanes, valued at about $50 billion. In 2007, ILFC brought in $4.73 billion in revenue and earned a profit of $604 million with a staff of 170. According to people familiar with the situation, one of Mr. Udvar-Hazy’s concerns is that his employees have been generating record profits, but their incentive awards are typically in AIG stock, which has fallen steeply.

ILFC Founder Weighs Split From AIG (WSJ)

Just reading about Steven Udvar-Hazy, you get the vibe that he is the kind of manager who meshes will with a culture like Berkshire’s. You really get that Rose Blumkin vibe about him. Just look at a couple of these quotes:

Mr. Udvar-Hazy likes to describe his job “as a hobby that I’ve found a way to get paid for. Some people play golf, I come to work.”

“Steve knows the industry better than anybody I know, and I know virtually everybody in the industry,” said Airbus’s Mr. Leahy, who over the years has become one of Mr. Udvar-Hazy’s closest friends.

Mr. Leahy said he was riding in a water taxi with Mr. Udvar-Hazy over the weekend in Venice at a conference when the two spotted a bright-red Airbus A320 jetliner flying overhead. “I said, ‘I wonder which carrier that is,’” Mr. Leahy said.

Mr. Udvar-Hazy didn’t hesitate, according to Mr. Leahy. “Unlike you, John, I know every one of my customers. That’s Myair, and that’s their No. 2 airplane.”

ILFC Founder Weighs Split From AIG (WSJ)

The likelihood of Berkshire being able to acquire this business from AIG is probably mixed. Buffett certainly has the cash available to do a deal like this, but I’m betting that he would face stiff competition from other firms when bidding for it. The other insurance businesses may be attractive to Berkshire as well, so AIG’s dismantling should create a number of opportunities for financial firms hoping to enter the insurance business and opportunities for those hoping to grow their businesses.