Yesterday, American International Group Inc. (AIG) and the US Treasury announced their decision to go ahead with the public offering of AIG’s common shares. While 100 million shares will be sold by AIG, 200 million will be sold by the Treasury. The total stock sale is estimated to be worth $9 billion at a price close to the Treasury’s break-even of $28.72 per share.
Besides, the Treasury has offered the underwriters to make an optional purchase of 45 million additional shares in order to cover over-allotments. Although the pricing of this stock sale is yet to be disclosed, the total offering is expected to account for about 20% of AIG's market value.
Additionally, according to previously laid out terms, AIG will not receive anything from the Treasury stock sale. However, the company expects to utilize $550 million of the net proceeds to fund part of a litigation settlement, while the remaining shall be used for its business operations.
Meanwhile, AIG has appointed BofA Merrill Lynch of Bank of America Corp. (BAC), Deutsche Bank Securities of Deutsche Bank AG (DB), Goldman, Sachs & Co. of Goldman Sachs Group Inc. (GS) and J.P. Morgan Securities LLC of JP Morgan Chase & Co. (JPM) as joint global coordinators.
Besides, Barclays Capital of Barclays plc (BCS), Citi of Citigroup Inc. (C), Credit Suisse Securities LLC of Credit Suisse AG (CS), Macquarie Capital, Morgan Stanley (MS), UBS Investment Bank of UBS AG (UBS), and Wells Fargo Securities of Wells Fargo & Co. (WFC) are the joint bookrunners for the offering.
The decision for the stock offering is a significant step to dilute the Treasury’s stake in AIG. In March, the company repaid about $7 billion to the Treasury, slicing its outstanding government debt to below $60 billion.
Further, under the recapitalization program processed in January this year, AIG freed itself of all loans it owed to the US Federal Reserve leaving the US Treasury with a 92% stake in the company. This holding would be sold over time depending on the performance of AIG’s shares in the market.
Meanwhile, the US government is working out its bailout strategy based on two primary premises that include earning the highest return on the taxpayers' investment that were used for bailing out companies and also liquidating its stake in private companies.
However, AIG’s stock market price was buoyant around $60 in the beginning of 2011 when the terms of recapitalization were laid out. This has now dropped by about 50% given the concerns regarding the company’s sluggish fundamental growth and the execution risk that also threatens AIG’s competitive position, particularly once the government takes back all support.
Hence, selling the stock at a notional loss could hit the Treasury’s profit-earning objective although it has given a green signal for stock sale giving in to the persistent pressure to move out of AIG as soon as possible. The current stock sale is expected to lower the Treasury’s stake in AIG to 77% from 92%.
Nevertheless, the Treasury is quite sure of not going ahead with the stock sale at a loss and could pull back the offering if it fails to pass the profitability test now or in future.
Going forward, we believe that AIG will now have to stand on its own feet once again, while maintaining ample liquidity and re-establish itself in the industry. This is also important to restore shareholder confidence.
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