AIG to Sell Its Blackstone Stake?

In an attempt to repay the government bailout, American International Group Inc. (AIG - Analyst Report) is planning to dispose its $510 million stake in The Blackstone Group (BX - Analyst Report).

According to the SEC filing, AIG had acquired 7% stake in Blackstone by investing $150 million in July 1998. In addition, during the initial public offering of June 2007, AIG was supposed to receive 48.8 million partnership units, being one of the Blackstone’s owners at the time. The partnership units are exchangeable for common shares on a one-for-one basis.

During November 2010, AIG planned to exchange 10 million of its partnership units for an equal number of shares, i.e. 10 million shares on December 15, according to the SEC filing. The company sold them for a total amount of $134.1 million.

Further, on December 9, 2010, AIG notified Blackstone that it will convert the remainder of its stake, i.e. 35.7 million Blackstone partnership units into common shares, selling about a $510 million stake, as per the SEC filing. AIG expects to receive the shares on February 9. The company’s exchange of a combined 45.7 million partnership units will thus increase the number of Blackstone common shares outstanding by about 18%.

AIG has been putting in efforts to complete its recapitalization plan, which was charted out by the U.S. Federal Reserve on September 30, to repay the $20 billion FRBNY credit line in full, facilitate the government’s ultimate exit from the company and repay a huge chunk of the $182.5 billion government bailout loan taken in September 2008.

According to the proposed plan, the FRBNY has agreed to divert AIG’s TARP loan obligations toward the U.S. Treasury. In turn, the Treasury will convert $49.1 billion of preferred shares held with the government to approximately 1.7 billion shares of the company’s common stock, at a discounted price.

However, the Treasury is still expected to hold about 92% of AIG’s common stock, the complete offload of which is not expected before the first quarter of 2011, after converting its preferred interests. This holding will be sold over time depending on the performance of the company’s shares in the market.

Accordingly, on October 8, AIG offered 74.48 million of its equity units, wherein every equity unit consists of a corporate unit worth 0.09867 shares of AIG’s common stock and $3.27 in cash, representing about 95% of the outstanding corporate units. However, the company had been able to tender only about 49.5 million of the corporate units for $161.8 million until November 23, even after extending the deadline twice.

AIG also vended off $500 million in three-year note and $1.5 billion in 10-years paper on December 2 amid strong demand in the market. Further, the company also established a $500 million contingent liquidity facility on December 15.

Besides, the $37 billion proceeds from the AIG’s ALICO sale to MetLife Inc. (MET - Analyst Report) and AIA IPO will be utilized to repay the line of credit extended to AIG by the FRBNY credit facility before the end of the first quarter of 2011. In addition, the company agreed to sell its AIG Star and AIG Edison life insurance companies for $4.3 billion.

The company is also expected to use the proceeds from the culmination of its Nan Shan deal in Taiwan for repayment of the credit line with FRBNY. Also, AIG recently joined hands with its Chartis division to purchase a 3 billion credit facility to repay the bailout loan.

Moreover, these credit facilities, combined with the debt offering and contingent liquidity facility, has infused momentum in AIG’s recapitalization program. This will, in turn, liberate the company from the restrictions including raising debts and issuing stock, worth $2–3 billion in the open market. These actions will also result in streamlining AIG’s operations and the debt reduction will strengthen its balance sheet.

The company is at present the only insurer left to repay its TARP loan, whereas Hartford Financial Services Group Inc. (HIG - Analyst Report) and Lincoln National Corp. (LNC - Analyst Report) have already repaid their bailouts and the Treasury raised more than $900 million by selling warrants in the companies.

Going forward, we believe that AIG will now have to stand on its own feet once again, while maintaining ample liquidity and re-establish itself in the industry. This is also important to restore shareholder confidence. However, the company is vulnerable to be marred by several one-time charges associated with the business restructuring, in the upcoming quarters.