NEW YORK American International Group and theTreasury on Wednesday said they will sell around $9 billion in AIG stock, but sources familiar with the situation said the Treasury would pull the sale if it cannot be done profitably.
AIG shares have fallen by more than a third this year, bringing the stock close to the government's $28.72-a-share break-even point. There has been speculation in recent days that the offering would have to be priced well below that in order to get done.
But the sources, speaking on condition of anonymity, said the Treasury was committed to making a profit on this and future offerings and would pull the deal off the table if it could not do so.
That makes the roadshow that began on Wednesday even more crucial, as the company will have to not only sell investors on the stock but also convince them the shares are worth buying without much, if any, discount.
AIG shares had their best day in nearly two months on Wednesday, closing up $1.03 to $30.65.
The offering is less than half of what had been contemplated by some people earlier this year. When Wall Street banks offered their services to manage the sale in January, there was talk among banking sources of an offering of more than $20 billion.
The Treasury and AIG only agreed in the last week on the size of the offer, the sources said, suggesting some of those expectations may have been inflated.
At one point earlier this year, the Treasury was sitting on a paper profit north of $27 billion. There was talk of a blockbuster stock offering in May, a second one later in the year and perhaps a third in early 2012 to get the government out of one of its riskiest investments.
In the meantime, AIG ran into asbestos problems at its property insurer Chartis, short sellers piled into the small number of shares still publicly traded and in four months the company shed more than a third of its value.
The Treasury would have to raise just over $47.5 billion from AIG share sales to break even.
Nonetheless some shareholders are disappointed the offering is moving ahead, as one made clear at AIG's annual meeting on Wednesday.
"I think the directors have mismanaged this. You're now selling stock at one half of what it sold for a few months ago," said Kenneth Steiner, who holds 600 shares of AIG. "What happened here is a real shame and real tragedy. It's only being made worse now by this dilutive offering."
Still, most of the shareholders who spoke at the meeting offered praise for the board's work and for Chief Executive Robert Benmosche in particular. Benmosche, the former MetLife CEO who took over AIG in the midst of the crisis, stopped the company's fire-sale breakup, energized the staff and restructured the company. He did much of it while undergoing treatment for cancer.
When AIG was rescued in September 2008 few expected it would even exist today. The company received $182 billion in bailouts and managed to restructure while preserving two core insurance businesses.
One of the few analysts still covering the stock said the shares were worth buying despite major headline risks.
"We still believe a high degree of execution risk remains, and while we would not rule out the need for future capital raises, we think the shares are undervalued versus peers and historical valuations," Standard & Poor's equity analyst Cathy Seifert said in a note on Wednesday.
AIG trades at about 0.65 times its book value, whereas other property insurers trade at an average multiple of 0.97, and other life insurers average 0.91, according to Thomson Reuters data.
Taking a loss on AIG would be a black eye for the Treasury, but the government is under pressure to exit its crisis-era investments in private companies. Some see the 2012 presidential election playing a role in that pressure, though the sources insisted the share sale is being managed independent of that influence.
The government turned a profit of $12 billion on its investment in Citigroup Inc but took a loss on its first sale of shares in automaker General Motors Co.
The prospectus filed on Wednesday said the Treasury would sell 200 million shares and AIG would sell 100 million. The Treasury has an option to sell an additional 45 million shares to cover excess demand.
Assuming the Treasury sells 200 million shares, the government stake in AIG would fall to 77 percent from the current 92 percent.