On Friday the U.S. Treasury Department announced the public offering of AIG common stock.
Today, the U.S. Department of the Treasury announced that it has launched an underwritten public offering of its American International Group, Inc. (NYSE:AIG) common stock. The size and price to the public of the offering will be announced after pricing of the offering. AIG has indicated that it intends to purchase up to $2 billion of the common stock sold by Treasury in this offering at the initial public offering price.
Unfortunately, the announcement does not include a note about the volume of the sale. However, AIG found it necessary to already mention that it will participate and repurchase what could be north of 60 million shares.
Two things I find noteworthy:
- The repurchase price. You see, I never bought into the idea that the U.S. Treasury will sell at $29, which has been purported as being a break-even price. The department has said over and over that it does not consider the mark of $29 as relevant for its decision to divest its AIG stake. Yet the market mistakenly assumed, despite direct arguments to the contrary, that $29 acts as a ceiling. The Treasury would simply dump all its shares as soon the stock hits $29 and, hence, will limit the upside of the stock. The Treasury is not only much more clever than that, but also much more responsible in its divestment approach. In that regard, the department, as well as the other institutions that helped protect the financial system, did a great job and deserve credit for its bold actions. The idea to sell the stake as soon as it hits $29 to just get the government out of its way is part of this mindless short-term thinking that got us in trouble in the first place. The Treasury department will sell its stake responsibly and over time and the ceiling ( called mistakenly by some a "floor") is irrelevant as can be.
- I wished to see AIG take the entire stake off Treasury's hands. That still may be a possibility. I do not see, however, the cash proceeds coming in at the moment for AIG to be able to buy a huge chunk of stock. I doubt whether AIG would issue debt to finance the repurchase as it would increase leverage ratios in the capital structure. If indeed a significant part of outstanding stock is sold to the public instead to AIG, I will update the accretion model. In fairness, an offering to the public, instead of to AIG itself, will be less value-adding for AIG shareholders. Nonetheless, the prospects of AIG are great, particularly given the negative attitude towards the company. My investment motto with AIG: The majority is always wrong.
Disclosure: I am long AIG.