Analysts are quietly applauding the decision by American International Group Inc. and the Treasury Department to proceed with a planned public offering of nearly $9 billion in AIG common stock, but their enthusiasm is translating into only muted recommendations.
New York-based AIG, which had received $182.3 billion in federal bailout money, announced on May 11 a total offering of 300 million shares, of which 100 million will be issued by the company. The Treasury Department, AIG's largest shareholder, will sell 200 million shares and make another 45 million shares available to cover overallotments if needed, according to an AIG statement.
Treasury officials were not available for comment and did not release a statement. The AIG announcement was timed to follow the company's annual meeting on May 11, when new directors and executives were announced, following its 10-K filing with the Securities and Exchange Commission a week earlier.
Treasury stands to reduce its 92.1% ownership stake to 77% through the offering, but analysts say the company still has to prove itself both internally and in the market before they get more excited about it.
“It looks like a good deal for the government,” said Tom Gandolfo, senior research analyst at value equity manager Third Avenue Management LLC, New York. Noting the stock's steep drop from $50 per share two months ago to a close of $30.49 on May 11, Mr. Gandolfo agreed that with the stock trading “well below book value, I'm sure a lot of investors are taking a look.”
“But we're a value shop. We've looked at AIG a number of times. We decided that it was overvalued and we passed. ... We do not feel any pressure on the timing” of deciding whether to recommend the stock.
Government sources agree that pressure to sell the stock is not an issue for Treasury, which needs $28.75 per share to break even on its investment. Treasury officials are pleased with AIG's steps toward profitability and are committed to get a good deal for taxpayers without staying in longer than necessary, according to sources who asked not to be identified.
Paul Newsome, managing director at financial services investment bank Sandler O'Neill & Partners LP, Chicago, finds AIG stock attractive for two main reasons. “At 60% of book value, that's a value stock,” he said, and “there are some attractive businesses and the core insurance operations are very attractive. Plus, you've got the ability for the company to restructure itself and look better. That makes for an interesting stock.”
However, there was also concern from analysts that the relatively small number of shares being offered — 200 million of the government's 1.66 billion shares, or just 12% to 15%, depending on whether overallotments are covered — would prolong share price uncertainty if the government chooses to release larger amounts to sell its holdings faster.
Government sources think the smaller offering will work in favor of the government and taxpayers. “It's simple supply and demand. As yesterday's market showed, the price is firming. It was a very smart move to reduce the size and firm the price,” a source familiar with the AIG/Treasury bailout agreement said on May 12. “They can always upsize the offer if more demand at prices they like.”
Price uncertainty shouldn't last long, the source added. “For a company that is selling at 0.7 times its book value, while other insurers are selling for more than 1, at these prices it looks like a gift to the market. There is little downside to buying the stock.”