Street Capitalist: Event Driven Value Investments

While I was never a believer that Warren Buffett would infuse capital in AIG (NYSE:AIG), or buy the company, I did think that he would be interested in Steven Udvar-Hazy’s aircraft-leasing unit International Lease Finance Corp. (ILFC). This belief mostly rode on two facts:

1. ILFC is a great business with a great moat that Berkshire Hathaway (NYSE:BRK.A) is not a part of.
2. Udvar-Hazy is the type of manager that would fit perfectly with Berkshire’s culture. No news has surfaced about Buffett or Berkshire and ILFC so far, but today the WSJ reported that Udvar-Hazy is attempting to buy ILFC from AIG:

Mr. Udvar-Hazy and other top ILFC officials have been in around-the-clock discussions with potential investors since late Sunday. Among the candidates for capital are private equity, pension funds, European banks, sovereign wealth funds and other non-U.S. equity. The discussions have involved a variety of options, ranging from an outright purchase to the potential of buying the bulk of the leasing company’s assets.

Mr. Udvar-Hazy and his management team are widely considered to be one of the most important ingredients behind ILFC’s ability to move nimbly in a daunting credit market. According to people familiar with the situation, he and other senior executives at ILFC have concluded that it would be virtually impossible for the leasing company to remain competitive as long as it is part of AIG. The deterioration of AIG’s once-impeccable AAA credit rating has raised ILFC’s borrowing costs to the point that the company would be unable to prosper in an increasingly crowded leasing market, the thinking goes. On Monday, Standard & Poor’s cut AIG’s long-term credit rating three notches to A-minus from AA-minus, and even with the federal loan it is unlikely that the insurer would be able to quickly restore its creditworthiness to previous levels.

Mr. Udvar-Hazy, a Hungarian immigrant, pioneered ILFC’s leasing niche when he founded the company 35 years ago with the help of countrymen Leslie and Louis Gonda, a father-and-son team. The founders sold ILFC to AIG in 1990 for $1.3 billion in stock, and Mr. Udvar-Hazy was given the reins to run the company in an entrepreneurial way…

ILFC officials have been frustrated for months that ILFC has been dragged down by the parent company’s woes, even as the leasing unit turned in record profits. In March, Mr. Udvar-Hazy began pursuing a corporate divorce, but was persuaded to hold off by AIG’s new top management team. As AIG’s position continued to deteriorate in recent days, it put further pressure on ILFC to begin exploring options that would allow the firm to disentangle itself from its parent.

ILFC Chief Is Trying to Buy Company Back From AIG (WSJ)

The article lists a varied group of financial entities that could be interested in helping Udvar-Hazy purchase ILFC from AIG. However, the company’s large debt load makes me believe that a private equity buyer will be less likely. Usually the PE model involves picking companies that can be leveraged to the hilt, not companies that are already highly leveraged.

Sovereign wealth funds on the other hand may be better suited for this kind of acquisition, at least for once they’d be purchasing a good company that has a nice competitive advantage for years to come - unlike the wave of capital infusion deals they made this last year or so.

Finally, a corporate buyer makes a lot of sense too because the current dealmaking environment seems more conducive to corporate deals over private equity deals. General Electric (NYSE:GE) is the owner of GECAS (GE Commercial Aviation Services) which is ILFC’s competitor and has an aircraft portfolio worth $45 billion dollars versus ILFC’s portfolio of $48 billion. Berkshire Hathaway is again positioned well for an acquisition like this. They have their AAA rating and a cash horde that could easily handle ILFC’s debt. Outside of these two, there are a host of financial firms who may see ILFC as an attractive business based on its strength, it could bring a safe stream of earnings.

This will be a good situation to keep watching, just to see how it plays out. It’s always insightful to see a great manager working to make his company better and I think we’ll be able to learn quite a bit from Udvar-Hazy’s actions as he tries to save ILFC from AIG’s problems.