NEW YORK, May 24 (IFR) - Having cleared the decks for the government to recoup its investment, American International Group is in the final leg of the stock sale that could net as much as $10.2bn. The sheer size of the 300m share offering relative to a scant public float and investor uncertainty with operational targets set forth by the insurer are weighing on deal execution.
AIG (AIG.N) shares are down 40 cents, or 1.2%, to $29.58, in midday trading today. Pricing is expected to come this evening to come at a slight discount to last sale.
Bank of America Merrill Lynch, Goldman Sachs and JP Morgan, the active leads, have indicated that investors have expressed interest within the $29-$30 context, though there is price sensitivity within that context. The book is covered within that range, according to sources at more junior levels of the underwriting syndicate.
“The actives are controlling the information,” said one source. “I suspect they have some very large orders and they are trying to convince some of those investors to lift their limits. It’s unusual on secondary sale to go out with information on demand this early.”
The Treasury is selling 200m shares on the base deal, and an additional 45m shares as part of the underwriter’s over-allotment option. A full sale would reduce the government’s holding to 1.4bn shares, suggesting it could take years to recoup its investment.
To breakeven, the government would need to sell at average prices of $28.72. The Treasury is reluctant to sell at prices below its cost basis, according to sources.
Yet include 100m shares that the company is itself selling and AIG’s free float would stand at just over 25%, from 7.4% currently. The overhang from additional sales is one factor weighing on deal execution.
Investors are also concerned over whether AIG will be able to hit operational targets outlined earlier this month by management in its quarterly report. Among those goals, the company is targeting return on equity of above 10% by 2015, from 6.2% in 2010, and mid-teens annual percentage growth in earnings through 2015, from $2.62 reported in 2010.
If the targets are achieved, AIG is a bargain. At current prices, the insurer’s shares trade at just under two-thirds of book value.
“There is a show-me attitude toward the business going forward,” said an ECM banker. “Cheap has its lumps,” he added, alluding to potential operational pitfalls going forward.
Stephen Lacey is deputy bureau chief of IFR Americas