May 12, 2008

AIG Leasing Unit Mulls Split-Up -

AIG Leasing Unit Mulls Split-Up -

Related: ILFC founder weighs Spilt from

This an interesting special situation that can yield value for investors who are willing to do some research. AIG is an insurance company that is planning to spin-off one of its subsidiary. One of AIG holdings is an Aircraft leasing company that AIG might spin-off to its shareholders. The rationale for the spin-off is articulated in the news article and it is not the concern of this post. My concern is the value opportunity that might arise from this special situation, which can yield handsome returns.

If AIG performs the spin-off, investors will hold another security in aircraft leasing. Most investors, retail and institutional are holding AIG for insurance exposure. I bet that they will sell the ILFC subsidiary as most of them do not want to hold an Aircraft leasing company due to over exposure to the sector or the size of the subsidiary is small to be held in their fund. This dynamic might create a bargain price of the spin-off company and a value opportunity for investors to take advantage of it.

Leasing companies trade at P/E of 10-13x trailing earnings. AIG's subsidiary (ILFC) made $1.08B in annualized profits based on Q1 of 2008. A back of the envelop calculations makes ILFC valued at $10-13 B dollars in market cap. Typically companies are separated so they can create value and enhance their business. An Aircraft leasing tangled with an insurance operations might not be able to execute to its full capability.

I am not a buyer of AIG to get the shares rather I will wait for a bargain price in ILFC shares. If one is presented to me, I will take a position. Spin-offs typically yield good returns based on academic research and ILFC is powerhouse in the industry.

Off course this a very preliminary identification of the opportunity, I will have do more research and scenarios plotting to see what type of a case I can build for such an opportunity. I have to look at management and their proposed compensation structure, valuation and potential risks in the leasing industry.

I will be writing more on the subject in due time, so stay tuned.

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