Yesterday, American International Group Inc. ( AIG - Analyst Report ) announced that it has priced its first secondary stock offering of 300 million shares since 2008, initiated with the US Treasury about a fortnight ago, at $29 per share, raising about $8.7 billion. The par value of these shares stood at $2.50.

The share price came in close to the Treasury’s break-even of $28.72 per share, which was set to recover the government’s $47.5 billion cash investment in AIG.

Moreover, according to previously laid out terms, Treasury will retain the booty raised from the sale of 200 million of stock, while AIG will raise about $2.9 billion from the sale of 100 million shares. The Treasury has offered the underwriters an opportunity to make an optional purchase of 45 million additional shares in order to cover over-allotments.

This could further contract the Treasury’s stake in AIG. Meanwhile, the underwriters earned $43.5 million as fees, which is 0.5% of $8.7 billion.

Yesterday’s stock offering is a prominent step to dilute the Treasury’s stake in AIG. In March, the company repaid about $7 billion to the Treasury, slicing its outstanding government debt to below $60 billion.

Further, under the recapitalization program processed in January this year, AIG freed itself of all loans it owed to the US Federal Reserve leaving the US Treasury with a 92% stake in the company. This holding would be sold over time depending on the performance of AIG’s shares in the market.

However, AIG’s stock market price was buoyant around $60 in the beginning of 2011 when the terms of recapitalization were laid. This has now dropped by about 50% at present, given the concerns regarding the company’s sluggish fundamental growth and the execution risk that also threatens AIG’s competitive position, particularly once the government takes back all support.

AIG’s disclosure of over $4.0 billion charge to mend a reserve shortfall at Chartis along with an 85% decline in earnings for the first quarter of 2011 owing to catastrophe claims further added to the woes and questions the company’s claims paying ability, earnings visibility and long-term growth from core operations.

Hence, selling stock for a notional loss could hit in the Treasury’s profit-earning objective although it has given a green signal for stock sale giving in to the persistent pressure to move out of AIG as soon as possible. The current stock sale will fizzle out the Treasury’s stake in AIG to 77% from 92%, leaving it with approximately 1.5 billion of equity shares and about $11.4 billion of preference shares in AIG.

Nevertheless, the Treasury is quite sure of not materializing the stock sale at a loss and could pull back the offering if it fails to pass the profitability test in future. The next session of share sale by the Treasury is expected only after the 120-day lock-up period. However, the entire stake is expected to be sold within the next two years.

Meanwhile, AIG appointed BofA Merrill Lynch of Bank of America Corp. ( BAC - Analyst Report ) , Deutsche Bank Securities of Deutsche Bank AG ( DB - Snapshot Report ) , Goldman, Sachs & Co. of Goldman Sachs Group Inc. ( GS - Analyst Report ) and J.P. Morgan Securities LLC of JP Morgan Chase & Co. ( JPM - Analyst Report ) as joint global coordinators.

Barclays Capital of Barclays plc ( BCS - Snapshot Report ) , Citi of Citigroup Inc. ( C - Analyst Report ) , Credit Suisse Securities ( USA - ETF report ) LLC of Credit Suisse AG ( CS - Snapshot Report ) , Macquarie Capital, Morgan Stanley ( MS - Analyst Report ) , UBS Investment Bank of UBS AG ( UBS - Analyst Report ) , and Wells Fargo Securities of Wells Fargo & Co. ( WFC - Analyst Report ) are the joint bookrunners for the offering.

AIG expects to utilize $550 million of the net proceeds to fund part of a litigation settlement, while the remaining shall be used for its business operations. Post share offering yesterday, the Treasury owes about $53 billion to AIG, while the outstanding loan from US Federal government under the Maiden investment vehicles stands at $23.6 billion.

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 for restoring the shareholders’ confidence.