American International Group, Inc. (NYSE: AIG) is seeing a mixed reaction this morning to the news that the U.S. Treasury is set to sell about 300 million shares with an implied value of close to $9 billion. This is a secondary offering, but it was so big initially that many are considering it an initial public offering.
The share sale has some bad news and some good news. The bad news is that Treasury is only getting to sell half of what it planned to sell. The underwriting group just could not sell the $20 billion or so initially sought. Actually, they could sell that many shares… but the discount was going to be too great.
We heard that the investment bankers were calling it closer to $25.00 per share but the stock was around $29 to $30 at the time. Treasury wanted closer to at-market prices. The government finally realized that investors will only absorb so much at current prices when they know that an exponentially higher amount of shares have to be sold in the months or years ahead.
As far as 300 million shares being sold, it appears that 100 million shares will be from AIG and 200 million will be from Treasury. Keep in mind that Treasury holds 92% of the current equity stake and that comes to just over 10% of its total 92% stake. The 200 million government-owned shares being sold compares to more than 1.6 billion shares held by Treasury.
Everyone is in the syndicate… Barclays, BofA/Merrill Lynch, Deutsche Bank, Goldman Sachs, J.P. Morgan, Citi, Credit Suisse, Morgan Stanley, Macquarie, UBS, and Wells Fargo.
The Treasury Department has maintained that it will realize a profit from the total AIG sale. What the government, or maybe it is AIG, doesn’t really seem to understand is that investors don’t really want to buy secondary offering shares when they know that each rally in the stock will be met by another announcement of a huge share sale.
Another huge risk is the market in general. What is the market does correct say 10% over the summer? That will leave a bad taste in the investors who bought into this secondary and finding an entire new wave of buyers might not be that easy.
AIG shares closed at $29.62 on Tuesday and we had shares trading down about 1% initially but the shares appeared to be around $29.69 right before the open. Right after the open, AIG shares are trading up $0.28 at $29.90. The bad news appears to so far look more like good news…
The good news is that this represents fewer instant dilution and increases the free float by far less than what was expected. The bad news is that about eight-times the shares being sold here now will have to be sold in the future. Lessons learned for General Motors Company (NYSE: GM), a.k.a. ‘Government Motors.’
JON C. OGG
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