Purchasers of AIG warrants can buy AIG shares at $45 anytime before January 19, 2021. On January 19, 2021, if AIG shares are trading above $59.06 ($45+$14.06), then the warrants are profitable. Obviously, the purchaser can sell the warrants anytime before that on the open market. The warrants also have an anti-dilution adjustment. See below.
"The initial exercise price is subject to anti-dilution adjustment for certain events, including ((i)) future stock dividends, distributions, subdivisions or combinations; (ii) the issuance of below market rights, options or warrants entitling the holder to purchase AIG common stock for a period of sixty days or less; ((iii)) dividends or other distributions of capital stock (other than AIG common stock); rights to acquire capital stock, debt or other assets (subject to certain exclusions); (iv) per share cash dividends in excess of $0.675 in the aggregate in any twelve-month period; and (V) certain above-market issuer tender offers for more than 30 percent of the then-outstanding AIG common stock."
Shares or Warrants?
On January 19, 2021,
- If the stock price is above $76.89, the warrants on a percentage basis will be more profitable. At that price, both will give a return of 127%.
- AIG will have to return 16%+ a year for the warrants to be more profitable.
- If AIG is $45, the shares will return 33% and warrants will lose 100% of their value.
So, should I buy the warrants or shares? An investor should buy the warrants if:
- They are very bullish on AIG (16%+ annual return).
- If they believe AIG will move up considerably over the next 2 years due to the catalysts we talked about in our article. In this case, the warrant will appreciate faster than the shares.
Warrants or Options?
If you do decide on the warrants, it is worthwhile to look at the 2014 January call options. The $45 calls look especially cheap trading at under $2. This might be a better alternative if you feel AIG has a chance to really shoot up within the next year and a half.
At HypeZero, we own shares of AIG, but we also believe the warrants will give good returns over the coming years.
Disclosure: I am long AIG.