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AIG Begins AIA Share Sale

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American International Group is planning to buy back less stock from the Treasury this year than analysts had expected, it announced today.

However, despite the disappointing news, John Nadel, an analyst at Sterne Agee & Leach in New York, said that he expects the Treasury Department’s interest in AIG stock to fall below 50 percent in the “near-term,” probably before Sept. 30, “when presumably AIG would enter its third quarter quiet period.”

That would likely trigger federal regulation of AIG. Currently, the U.S. Treasury owns 53 percent of AIG.

AIG also announced that it was selling only a portion of its remaining stake in American International Assurance, or AIA Group Ltd., its Hong Kong-based life insurance subsidiary, not the full amount that analysts had expected. It had been expected that AIG would sell all its remaining shares in AIA after a so-called “lockup period” ended Tuesday, raising an estimated $7.5 billion. In today’s announcement, AIG said that it has commenced a sale in Hong Kong of up to $2 billion worth of ordinary shares of AIA.

After that sale is completed, AIA Aurora LLC, a wholly-owned subsidiary of AIG, expects to transfer all of its remaining interest in AIA to its parent, AIG.

This is the third time that AIG has offered shares of AIA, the third-largest Asia-based insurer by market value. The sale will leave AIG with a 13.6 percent stake in the Hong Kong-based company.

Additionally, AIG’s board said it had authorized the repurchase of up to $5 billion of its stock from the Treasury.

Nadel had expected AIG to authorize the purchase of $10 billion of its stock from the Treasury Department by the end of the year. 

The decisions to buy back less stock than expected and not unload all of AIA triggered a sell-off of AIG stock in New York Stock Exchange trading. AIG was selling at 34.5450, down 26.5 cents, or .76 percent, in a soaring stock market which was up almost two percent on optimistic news about Europe.

Nadel said AIG currently has 1.630.1 billion shares outstanding and the Treasury owns 871.1 million of those shares, or 53.4%. 

“If you assume that the Treasury sells $5 billion of stock at $33 per share and AIG repurchases all of those shares (they now have a $5 billion buyback authorization), then Treasury’s stake would fall to about 720 million shares out of a total outstanding of 1.479 billion shares, or 48.7%.

“I would assume Treasury will sell at least $5 billion of stock in the near-term and likely more than that, assuming private investors have appetite for the stock,” Nadel said.

“The bigger the discount Treasury is willing to offer, the larger the deal size in number of shares offered, in my opinion,” he said.  “But under almost any reasonable scenario, Treasury’s stake will fall below 50% on this next offering.”

Paul Newsome, managing director at Sandler O’Neill Research in Chicago, said in an investor’s note this afternoon that the AIG announcement “looks like preparations for another common stock offering by the Federal government.” He said Sandler O’Neill “would not be surprised if another sale came quickly.”

Like Nadel of Sterne Agee, he said the federal government’s 30-day lock-up period expired earlier this week, adding that in the past year, the federal government “has been fairly quick to begin another sale of its shares shortly after either the lock-up period and/or the announcement of earnings by the company.” Again, confirming Nadel’s views, he said Treasury would need to dispose of 75 million more shares from its stake for its ownership level to fall just below 50 percent. “We view this prospect as likely prior to the upcoming Presidential elections,” Newsome and associates said in the note.


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