Desperate Times Are Back Again

Even an $85 billion bailout couldn't save AIG from itself...

In September 2008, the insurance giant was effectively done for. The U.S. banking sector had collapsed. Major financial institutions like Bear Stearns, Lehman Brothers, and Citigroup (C) either failed or were saved by public intervention.

AIG – also known as American International Group (AIG) – was lucky enough to receive plenty of help from the U.S. government. Its next job was to raise enough cash to pay back the $85 billion loan.

Under the hood, AIG was a lot more than just an insurance company. It also owned one of the largest aircraft-leasing operations in the world, called International Lease Finance Corporation ("ILFC").

ILFC was one of the biggest buyers of Boeing and Airbus jets... which it would lease to airlines for a nice profit.

AIG figured it could sell ILFC to help repay the government. Aircraft leasing was a great business to be in, especially given the strong tailwinds in global commercial travel.

Yet AIG got stubborn about the sale... which ended up costing it big. And as we'll explain, another aircraft lessor managed to swoop in and prey upon the chaos.

Like AIG, Steven Udvar-Hazy – ILFC's co-founder – knew the value of aircraft leasing...

He had sold ILFC to AIG for $1.3 billion in 1990. Now that AIG was being forced to shed assets, he wanted his old business back. And he was willing to pay top dollar.

Udvar-Hazy got a group of investors together to offer $10 billion for ILFC. That would've given AIG a huge chunk of the cash it needed to pay off its loan. And yet, AIG stalled negotiations... possibly holding out for more cash.

What a mistake that was...

ILFC's business came under even more pressure after 2008. While it had a huge aircraft fleet, it had also acquired a mountain of debt while building up that fleet. And in the wake of the Great Recession, air travel stalled. Airlines spent less on new planes.

In other words, no one else wanted to buy an aircraft company.

By 2012, AIG was still sitting on ILFC. It was trying to sell to a group of Chinese investors for just under $5 billion. And when that offer fell through, it was forced to take a deal from Dutch aircraft lessor AerCap (AER).

AerCap agreed to buy ILFC for $3 billion in cash and a little less than 100 million AerCap shares in 2013. The total value of the deal was right around $5 billion... half as much as Udvar-Hazy had offered just a few years prior.

This isn't just a story about AIG's bad choices, though...

It's also a story about AerCap – a strategic acquirer that knew it was in the right place at the exact right time.

AIG would never have sold ILFC if it hadn't been forced to do so. And it certainly wouldn't have accepted such a steep discount if it hadn't gotten desperate.

AerCap saw a deal it couldn't pass up. It instantly became the second-largest plane-leasing company in the world... after General Electric's aircraft-leasing business, GECAS, which it also eventually bought.

Investors understood AerCap's game right away. It was buying a major leasing competitor and building itself into an industry giant. They knew there was a reason ILFC's co-founder had been willing to pay twice as much for the business.

AerCap's stock was trading for around $20 per share in November 2013. When news of the transaction broke that December, shares nearly doubled. And by the time the deal closed in May 2014, AerCap had reached nearly $50 per share.

Said another way, one savvy transaction sent AerCap's stock up almost 140% in six months.

And while there's no denying this was a rare opportunity... it's far from once-in-a-lifetime.

These situations crop up whenever times get tough. We're seeing it again today, when interest rates are high and debt markets are largely closed.

One in three U.S. companies is now facing a "Wall of Debt." They owe so much money that there's no way they can service it all... and they'll hemorrhage cash, employees, and assets trying to keep up.

These companies are already being forced to spin off assets just to appease investors – and stay afloat.

And smart acquirers will reap the benefits.

Regards,

Joel Litman
February 22, 2024