Fresh on the heels of a victory in its bid to buy Canadian energy exploration firm Nexen (Toronto: NXY), China is preparing to test its luck once again with another sensitive attempt to buy one of the largest US aircraft leasing companies from insurance giant AIG (NYSE: AIG). I previously predicted the Canadian government would ultimately approve the purchase of Nexen from state-run Chinese oil major CNOOC (HKEx: 883; NYSE: CEO), which the government of Prime Minister Stephen Harper finally did just before the weekend after months of foot dragging. But a separate group of state-backed buyers that includes China’s biggest bank ICBC (HKEx: 1398; Shanghai: 601398) should look closely at the fine print in final Nexen verdict, which could presage a bumpy flight path ahead in their surprise $5.5 billion bid for ILFC, the aircraft leasing arm of AIG.
Let’s start out by looking at the CNOOC-Nexen deal, which began over the summer when the Chinese oil major launched its surprise bid for the Canadian company in a deal valued at about $15 billion. CNOOC announced a number of concessions when it first announced the deal, including the retention of much of Nexen’s top management and a listing of CNOOC shares on the Toronto stock exchange.
CNOOC added a few more incentives later to give the Canadian government the cover it needed to finally approve the deal, which was facing some public resistance despite the fact it had little or no ramifications for Canada’s national security. (English article) In approving CNOOC’s purchase, Harper’s administration also at the same time approved another similar controversial deal that would see Malaysian government-owned Petronas take over another Candaian energy firm, Progress Energy.
I’m less familiar with the Petronas deal, but I suspect that it also has few implications for Canada’s national security. Accordingly, Canada is making a smart move in approving both deals, since both companies sorely need the money that both CNOOC and Petronas can provide to help them develop their various assets that include the rights to look for oil and other resources around the world.
But in approving the deal, Harper’s government also made the somewhat unusual comments that it wouldn’t approve any similar deals involving the purchase of its major energy companies by foreign state-controlled firms. That’s important, because it shows that Canadians still harbor a certain level of distrust and skepticism about allowing their major firms to be controlled by other countries’ state-run companies.
That point is a good transition into the discussion of the second deal, which has a Chinese group that includes ICBC in talks to buy 90 percent of ILFC from AIG. (English article) The fact that AIG is selling ILFC isn’t really a surprise, since the US insurance giant has been slowly selling off many of its non-core assets in an effort to repay a $182 billion bailout it received from the US government in 2008 at the height of the global financial crisis.
But the fact that AIG is aiming to sell the company to a Chinese group does come as a bit of a surprise, following a number of other recent controversial decisions by the US government aimed at blocking Chinese deals over security concerns. The most high profile of those saw Washington in October block Chinese telecoms equipment giants Huawei and ZTE (HKEx: 763; Shenzhen: 000063) from selling their networking equipment in the US due to concerns about the potential for spying by Beijing. A more recent move has seen a US industry group lobby the government to block the sale of a bankrupt battery maker named A123 to a Chinese buyer, again citing security concerns because A123 is a defense contractor. (previous post)
So, the big question now becomes whether politicians in Washington will approve the sale of ILFC to this Chinese group. AIG is taking a big gamble by negotiating this deal, and thinks it can ultimately win. It knows that Americans want to see the company repay its big debt to the US government, and the Chinese buyer is clearly willing to pay the best price for ILFC.
But I also think that AIG may be underestimating the sensitivity of this deal, as ILFC leases aircraft to most major US airlines and thus is a very important player in the domestic aviation industry. Accordingly, I seriously doubt this deal will be able to get government clearance it needs to proceed, and ultimately AIG will have to sell the company to someone else at a lower price.
Bottom line: The US is unlikely to approve the sale of aircraft leasing giant ILFC to a group of Chinese buyers due to national security concerns.