Uncle Sam is making a profit on AIG, sort of, so far… This huge highly awaited offering from American International Group Inc. (NYSE: AIG) has been priced and this should be considered an IPO more than just a secondary offering for all practical purposes.  Wall Street is selling 300 million shares of AIG to Main Street at $29.00 per share.

The underwriting group is massive.  The lead underwriters are Bank of America, Deutsche Bank, J.P. Morgan, and Goldman Sachs.  Co-managers are listed as Barclays, Citi, Credit Suisse, Macquarie Capital, Morgan Stanley, UBS Investment Bank, and Wells Fargo Securities.  The underwriters have an overallotment option to sell up to 45 million more shares from the Treasury if demand is there. 

The offering will have raised come $8.7 billion, a far cry from the $20 billion that was expected to be sold back when shares were higher.  The breakdown is 200 million shares from the Treasury and 100 million shares from the company.  The 100 million shares from the company will bolster AIG’s books or give it capital to purchase more distressed assets if it can figure out a way to get approval for that effort.  More than $500 million of the proceeds will go back to compensate investor losses.

The closing price on Tuesday was $29.46, but the pain here has been massive.  Shares are down about 50% from the highs earlier this year.  There are some prior lessons learned if you consider recent share sales of Citigroup Inc. (NYSE: C), Mosaic Co. (NYSE: MOS), Dollar General Corporation (NYSE: DG), and even Petroleo Brasileiro (NYSE: PBR).  There are even lessons from the share sale of Genworth Financial Inc. (NYSE: GNW) from General Electric Co. (NYSE: GE). 

The government only needs a share price of $28.73 on average per share for it to breakeven on its bail-out investment.  We do not subscribe to the conspiracy theory that Wall Street drove down the price to keep the government from making more money on AIG’s share sale, but there are some price issues that Main Street investors need to consider.

Over the last two weeks, the average share price is close to $31.00.  AIG shares were at $35.00 as recently as April 7, 2011. Shares were above $40.00 as recently as February 25, 2011 and shares on an adjusted basis were above $50 as recently as January 7, 2011.  Holders are supposed to sell shares when they are strong rather than weak and this share sale has been a highly telegraphed event.  The most recent short interest was up over 10% to over 36.6 million shares, but the options trading has been a bit mute considering the sheer size of this offering.

The long and short is that shares are already being sold off at the same time that AIG’s core operations continue to stabilize and improve.  AIG is one of those issues that investors can go through their entire thesis and the only issue at the end is “Therefore, you should buy” or “Therefore, you should sell.”  Our take is that the share price drop has more than priced in this latest offering and it is already known that Uncle Sam will be divesting the rest of the taxpayer’s share ownership over the coming months to years.

What AIG, or the Treasury, needs to do is score Berkshire Hathaway Inc. (NYSE: BRK-A) in the offering and somehow manage to get it out that Warren Buffett has decided to add shares through time.  The problem in that thesis is that Berkshire Hathaway is already deep into just about all aspects of insurance and Buffett might not want to have to explain how one of the most hated companies in America is a good value for the future.

The early bird indications put AIG shares down around $28.85 but we still have more than three hours until the market opens.  The DJIA has been down three days and we have seen a three-week mini-slide in the DJIA.  AIG cannot escape market sentiment and the fears of that 10% correction are coming back again.  Still, the market cannot under any circumstance today claim that it has not had time to factor in this share sale.  That is particularly the case when you consider that the offering is half of prior expectations.  In a month you will have close to ten new analysts making Buy-Sell-Hold recommendations on AIG.

If you do not trust our angle on the AIG outlook, Reuters ran a audio-video analysis going into this offering with much deeper data that supports the offering as well.  Still, not all on Wall Street are in support of the sale.  I spoke with a broker yesterday that is in the syndicate and he opined that calling customers to see if they wanted to buy AIG shares here today was little different from calling a customer about a California municipal bond.

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JON C. OGG

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