Street Capitalist: Event Driven Value Investments

One of the stories I’ve been following for a while is the sale of AIG’s International Lease Finance Group (ILFG). This is a best in class company, run by a very able entrepreneur with a true passion for the business. At the time, I said that whoever bought this company would be in for a real gem, something akin to one of the many businesses acquired by Warren Buffett’s Berkshire Hathaway in the past.

While I mentioned that this would be a great catch for Berkshire, it’s likely that the unit will fetch a price that’s just too high for Buffett to pay. Yesterday, Bloomberg reported that a deal for the unit will close early next year:

“We’re in the process of selling ILFC to a group of investors including management that will take back the company from AIG,” Steven Udvar-Hazy, the unit’s founder and chief executive officer, said yesteray at an aviation conference in Cancun, Mexico. He suggested the unit had a value of about $10 billion and didn’t identify the investors.

“Early next year, we will consummate the closing,” he said in a subsequent interview. “One thing is to reach a deal. It’s another to close the deal.”

The pending sale is “extremely good news” for both AIG and ILFC, Richard Aboulafia, an analyst with aviation consulting firm Teal Group in Fairfax, Virginia, said in an interview.

For ILFC, “no matter how sound the fundamentals of their business were, they were being dragged down by AIG’s negatives,” Aboulafia said. “For AIG, it’s good news because they need the money.”

Aboulafia said Udvar-Hazy has track record of making a profit in aviation and that he’s probably the industry’s most powerful executive as a key customer for jets. “He created this, he can run it,” Aboulafia said.

ILFC, which Udvar-Hazy founded in 1973 and took public 10 years later, will have revenue this year of about $5 billion. Net income for the first nine months was $913 million, up 39 percent from the same period last year, he said.

AIG to Sell ILFC to Management Group Next Year, Udvar-Hazy Says (Bloomberg)

What’s interesting about this is the fact that deal making has changed over the course of the financial crisis. Initially, the the US government took a much less active role in these types of interventions, they would back financing and have a bigger player consumer the smaller at fire sale prices.

Now though, with the US taking sometimes 80% of control in some of these financial entities, fire sale prices and quick deals work against tax payer interests. It’s really going to create a new dynamic for deals, we’re going to be in for longer go-shop periods in order to make sure that meaningful returns are made on government investments. This is probably why we haven’t seen a deal for ILFC already and why the price is going to be too high for value-sensitive groups like Berkshire.