Insurer to Pay $1.3 Billion for ILFC Jet-Leasing Firm

International Lease Finance Corp., the Beverly Hills-based aircraft leasing firm, said Monday that it will be acquired as a wholly owned subsidiary of American International Group Inc. in a cash-and-stock deal valued at about $1.3 billion.

The merger agreement offers shareholders the option of accepting an all-cash price of $31.50 per share or a combination of 0.3 shares of American International stock and 50 cents for each share of ILFC stock.

At the cash price of $31.50 per share, the transaction provides only a small premium over ILFC’s recent share price, which closed trading Monday at $27.125. Analysts were disappointed by the price.

American International is a leading international commercial and industrial insurer, operating in 130 countries. The New York-based firm said it would finance the cash portion of the acquisition from internal sources and provide up to $125 million of financing to ILFC.

American International’s deep pockets are considered by analysts to be the primary motivation for ILFC to sell out. Analysts predict that ILFC will need to raise $10 billion in additional capital to pay for jet aircraft on order over the next five years, heavily adding to its current debt of about $2.3 billion.

Under terms of the transaction, ILFC shareholders must approve the deal. But about 60% of the stock is held by company chairman Leslie L. Gonda, president S. F. Udvar-Hazy and vice president Louis L. Gonda. The company has just over two dozen employees.

The sales agreement provides for a flexible exchange ratio of shares, based on future changes in American International shares. If AIG stock rises above $104 per share, the value of the AIG stock portion will be $31.20. If it falls below $86, the figure will be $25.80.

The price fetched for ILFC did not overwhelm analysts, who cited recent negative publicity about the ILFC’s fortunes.

American International is “not overpaying,” Bateman Eichler, Hill Richards’ analyst Daniel Hersh said Monday. “If anything, there is a question of whether it is fair.”

Hersh said that a negative view of ILFC that has been promoted by short sellers of the stock holds that its future earning power is supported solely by the continued strength in the commercial used aircraft market. ILFC officials did not return phone calls Monday.

That view has hurt the company’s stock in recent months. ILFC shares are selling at about 12 times their projected earnings for the next fiscal year, Hersh said, despite projections that the company will enjoy double-digit profit growth. On that basis, the stock “ought to be selling at 15 or 20 times earnings,” he added.

The problem is the “aircraft bubble”--the historic boom in commercial aircraft and the possibility of a collapse in the current price strength of those jetliners, an issued addressed in an April article in the financial newsletter Grant’s Interest Rate Observer. The article focused on the extent to which ILFC’s earning power is supported solely by growth in the prices of jet aircraft.

ILFC leases aircraft to airlines and then sells or releases them after a fixed period. (It currently owns 96 aircraft.) Thus, its earning power depends to a great extent on the resale value of the aircraft after the lease expires, the article noted, rather than the ability of lease revenues to cover interest payments on the aircraft.

As ILFC has grown, its ability to cover interest payments with profits has sharply diminished, the Grant’s article noted. In addition, Grant’s pointed out, the firm was forced to take a $4.5-million charge against first-quarter earnings when British Island Airways, a former lessee, went bankrupt.

Despite such concerns, ILFC has continued to show strong profit growth. On Monday, it reported that net income shot up 57% in its second quarter ended May 31. The firm earned $24.7 million on revenue of $111.7 million, up from a profit of $15.7 million on revenue of $87.1 million.

“As of today, we are fully sold out through 1992 and have signed lease commitments covering 75% of our 1993 and 25% of our 1994 scheduled deliveries,” Leslie Gonda said. “We look for sustained results for the remainder of the year and going forward.”