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Deal for AIG unit caps record year for Chinese investment in U.S.

Chinese companies have snapped up $6.5 billion in U.S. assets this year, and the buying spree is expected to continue. Analysts suspect it will face greater political scrutiny.

December 11, 2012|By Don Lee and W.J. Hennigan, Los Angeles Times
  • The deal for International Lease Finance Corp., a Century City subsidiary of insurance giant American International Group Inc., is a likely harbinger of more and bigger deals to come.
The deal for International Lease Finance Corp., a Century City subsidiary… (Mark Lennihan / Associated…)

Capping a record year of Chinese deal-making in the U.S., a consortium of state-owned and private investors is planning the biggest Chinese takeover of an American company: $4.2 billion for one of the world's largest aircraft leasing firms.

The deal to buy 80.1% of International Lease Finance Corp., a Century City subsidiary of insurance giant American International Group Inc., followed a weekend auction in which another Chinese company bought three U.S. factories and other assets of electric-car battery maker A123 Systems Inc.

Chinese companies this year also have picked up AMC Entertainment, one of the largest movie theater chains in North America, as well as stakes in energy, real estate and other companies in service industries.

The deal for the aircraft leasing firm, which must be cleared by federal officials, is a likely harbinger of more and bigger deals to come and reflects the increasing sophistication of Chinese companies and their determination to expand into new markets and strengthen their technologies and global capabilities.

ILFC owns and manages a fleet of more than 1,000 aircraft. With plush headquarters at Constellation Place, formerly known as MGM Tower, the company has relationships with nearly every major airline around the globe.

Industry experts said they didn't see any apparent grounds for the U.S. government to reject the sale of ILFC, which has been on the market for four years and has little in the way of sensitive technologies that would threaten U.S. competitiveness or national security.

Even so, with the Chinese ramping up their investments in the U.S., analysts suspect they will face greater political scrutiny as the Chinese make increasingly bold and diverse moves to deepen their footprint in the U.S.

Excluding the ILFC deal, which is not expected to close until spring, direct investments by Chinese companies in the U.S. are likely to reach $6.5 billion this year, which would break the previous record of $5.2 billion in 2010, according to Rhodium Group, which tracks Chinese investment.

"The air is thick with concerns over China playing a role in the American economy," said Tom Captain, principal and vice chairman of the aerospace and defense practice at financial advisory firm Deloitte. "There's always going to be a question of due diligence and suspicions about their motivations."

AIG, which disclosed the sale Sunday, said it and ILFC are consulting with all relevant U.S. regulatory agencies and intend to submit the deal for review by the Committee on Foreign Investment in the United States, which has considerable latitude in deciding which transactions to evaluate.

The committee, a Treasury Department-led group, reviews the assets and the detailed backgrounds of the buyers and considers the effect of such transactions on the national security.

Jon Diat, an AIG spokesman, pointed out that only 8% of its fleet was leased to U.S. carriers.

Although AIG has been trying to unload ILFC since 2008, when the New York company nearly collapsed and was forced to go under government control, the decision to sell rather than go public, as planned, caught onlookers off guard.

In the aviation world, little is known about the buyers, who have an option to acquire an additional 9.9% of ILFC, bringing the total price to nearly $5.3 billion. The investor group is composed of New China Trust Co., China Aviation Industrial Fund and P3 Investments Ltd.

New China Trust and China Aviation are state-controlled, and P3 is privately managed, said Derek Scissors, a Heritage Foundation economist who has long studied Chinese investments in the U.S.

In shattering the previous investment record, Scissors said the Chinese have come full circle from late 2004, when they announced the first big U.S. deal with Lenovo Group's purchase of the personal computer business of IBM Corp.

At the time, it seemed to presage a new era of Chinese investments in the U.S., but the following summer, a Chinese state-owned company, CNOOC Ltd., withdrew its bid to buy Unocal Corp. after encountering fierce opposition in Congress.

And that sent a chill through Chinese investors looking at the U.S. Many instead focused largely on Africa, South America and Asia in search of energy and other commodities.

This year, though, the top three destinations for Chinese investments are expected to be three developed countries: Canada, the U.S. and Australia. Canada on Friday approved CNOOC's $15.1-billion takeover bid for oil-sands operator Nexen Inc.

"The Chinese complain and complain that the U.S. market is closed, but they're making deals," Scissors said. Based on the pattern of past Chinese investments around the globe, "I think we'll have another big year of buying next year" in the U.S.

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