HONG KONG (Reuters) - American International Group Inc launched a widely expected sale of a stake in its former Asian unit AIA, providing the insurer with funding to help repurchase up to $5 billion of its stock from the U.S. government.
While the U.S. Treasury has not yet announced another share sale, its latest lockup expired early this month, meaning an offering would potentially bring the government’s investment below the 50 percent mark for the first time. The Treasury on Thursday declined to comment on the potential for any upcoming sales.
AIG’s shares fell sharply in early trading, even as the rest of the insurance sector rallied, though they pared losses by late afternoon. One analyst said the news was “meaningfully below both our and consensus expectations.”
AIG’s sale of up to $2 billion of AIA Group Ltd shares comes two days after a lock-up period on such a sale expired, but is only about a quarter of the $7.6 billion stake the U.S. insurer owned and could have sold. AIG sold $6 billion worth of AIA shares in March.
AIA, Asia’s third-largest insurer, was spun out of its parent company in October 2010, when AIG Chief Executive Robert Benmosche oversaw the company’s listing in Hong Kong after a failed takeover offer from Prudential Plc.
Since the listing, AIA’s shares have soared about 34 percent and become a top choice of fund managers looking to benefit from growing wealth in Asia and booming demand for insurance and other financial products.
AIA has built a sprawling and successful business across the region, with an army of hundreds of thousands of agents. In July it reported better-than-expected first-half results, with net profit climbing 10 percent to $1.44 billion.
AIG is offering about 600 million shares in a range of HK$25.75 to HK$26.75 each, equivalent to a discount of 2.1 percent and a premium of 1.7 percent to AIA’s Thursday close of HK$26.3 ($3.39), a term sheet of the deal showed. It is restricted from selling the remaining $5.6 billion stake for three months, the term sheet noted.
The partial sale surprised some Hong Kong bankers and investors, who expected the company to dispose of its entire stake. It was also unusual for AIG to offer the shares at a premium, when block trades normally come at a discount to attract investors.
“At the end of the day, this is small compared to AIG’s overall holding, and so it doesn’t remove much of the overhang,” said Kenneth Yue, an analyst at CCB International in Hong Kong.
Benmosche said in May AIG would sell its shares in AIA in September, once the lockup expired, but early in August he told an analyst conference call he was looking for the right time and the right price to sell the stake.
The AIA transaction comes amid a slump in equity deals in Asia-Pacific, where volumes so far in 2012 are down 33 percent to $98.2 billion, according to Thomson Reuters data.
Deal-starved bankers in Hong Kong jostled for a role in the AIA sale, looking for a boost to their league table rankings. Deutsche Bank and Goldman Sachs were hired to jointly manage the $2 billion block sale, the term sheet showed.
Since a 2008 bailout that swelled to $182 billion, AIG has worked to shed business units and pay back the U.S. government.
The U.S. Treasury in August reduced its stake in AIG to 53 percent with the sale of nearly $6 billion worth of shares for $30.50 per share.
The shares fell 0.9 percent to $34.48 in late-afternoon trading, well off their morning lows. The stock is nearly 50 percent higher for the year.
In a statement, AIG said its board had authorized $5 billion in buybacks, solely from the Treasury, which replaces all other authorizations. The company noted there was no guarantee the government would conduct an offering.
“The sale of only a partial stake of AIA and only $5 (billion) of potential buybacks leaves us underwhelmed, and we expect the stock will come under considerable pressure given the much lower-than-expected buybacks from Treasury near-term,” Sterne Agee analyst John Nadel said in a note to clients.
At current prices, assuming AIG used the entire $5 billion, the government’s stake would be reduced to around 44 percent. After an early 2011 recapitalization, the Treasury held 92 percent of the company, a position it has reduced with four subsequent sales.
AIG is funding only part of the buyback with the AIA proceeds because of ample capital elsewhere to pay for the rest. In early August the company had more than $11 billion in parent company liquidity, which analysts expect to be largely devoted to buying the government out of the stock. ($1 = 7.7571 Hong Kong dollars)
Additional reporting by Vikram Subhedar, Clare Baldwin, Kelvin Soh and Denny Thomas in Hong Kong and Ben Berkowitz in Boston; Editing by Michael Flaherty, Muralikumar Anantharaman, Sofina Mirza-Reid and Leslie Adler