Basking after a good second-quarter performance, late last week
American International Group Inc.
) announced that the U.S. Treasury will vend off shares worth about
$5.0 billion of the company, which were held by the latter.
In this fourth round of stock sale, the Treasury has offered to
buy back about 163.9 million shares for an average price of $30.50,
modestly above the Treasury's break-even of $28.73 per AIG share,
thereby totaling $5.0 billion.
While AIG intends to repurchase 98.4 million shares for $3.0
billion, the remaining $2.0 billion worth of stock will be raised
through open market operations. In addition to the $5.0 billion
stock offering, the underwriters are granted a 30-day option of
buying another 24.6 million shares for $675 million.
The total stock sale will in turn bring down the Treasury's
stake in the company to 55% from the prior 61%, while the former
will still own about 1.06 billion shares of AIG. The Treasury's
stake was previously reduced from 70% to 61% in May this year when
it raised about $5.7 billion from the sale of about 189 million
shares for an average price of $30.50. Preceding this, the
Treasury's stake was reduced from 77% to 70% in March this year, by
shedding 206.9 million shares at $29 per share, amounting $6.0
Prior to this, in its first secondary stock offering in May
2011, the Treasury had reduced its ownership in AIG from 92% to 77%
and it earned about $8.7 billion by selling stock worth $200
million. Following the sale of the current stock offering, AIG will
owe about $25 billion to the U.S. government, thereby reducing the
burden of the $182.3 billion bailout loan, which was taken by the
company in September 2008.
The U.S. government has appointed BofA Merrill Lynch of
Bank of America Corp
Deutsche Bank AG
Goldman Sachs Group Inc.
JPMorgan Chase & Co.
), Macquarie Group Ltd.,
Wells Fargo & Co
Credit Suisse AG
) as book-runners of the latest stock offering.
High Growth Potential Amid Federal Concerns
Given the modest acceleration in AIG's stock price in the recent
months along with an impressive first half of 2012 financial
results, we believe that the Treasury is likely to shed off its
stake in the company sooner-than-expected, while also generating
modest returns out of this investment.
Last week, AIG reported its second-quarter 2012 operating
earnings per share of $1.06, outshining the Zacks Consensus
Estimate of 59 cents as well as year-ago quarter's earnings of 68
cents per share. Consequently, operating net income surged 49.8% to
$1.86 billion from $1.24 billion in the year-ago quarter.
Results reflected improved operating performance across business
operations, increased fair value of Maiden Lane III LLC and lower
catastrophe losses that drove the operating cash flow, book value
per share and return on equity (ROE). These were partially offset
by reduced premiums growth in SunAmerica and Chartis as well as
decrease in the fair value of American International Assurance Co.
Ltd (AIA) and higher operating expenses.
However, even after the latest stock sale, the Treasury would
own more than 50% of AIG. Conversely, a further decline of the
Treasury's stake could raise other fresh regulatory challenges for
AIG from the Federal Reserve, who still supervises the company.
Moreover, higher expenses, volatile equity markets, widening credit
spreads and reduced interest rates continue to showcase declines
that will persistently pressurize the margins.
Thus, we remain on the periphery at the moment to analyse the
managerial and financial developments in AIG going forward.
Consequently, we maintain a long-term Neutral outlook on AIG with
Zacks Rank #3, which also implies a short-term Hold rating.
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