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In an attempt to repay the government bailout loan, American International Group Inc. (AIG - Analyst Report) announced its plan to sell a part of its stake in its Asian wing – AIA Group Limited (AIA) – for $2.0 billion.

Accordingly, AIG has offered about 591.9 million of its AIA shares at a price of HK$26.50 (approximately US$3.42) per share, thereby raising $2.0 billion in gross proceeds. The price per share is pegged at a premium of 0.8% to AIA’s closing price of HK$26.30 yesterday. The sale is expected to be culminated by September 11, 2012.

Meanwhile, all the shares will be sold among the institutional investors through private placement, although they remain unnamed. AIG appointed Goldman Sachs Group Inc. (GS - Analyst Report) and Deutsche Bank AG (DB - Analyst Report) as the joint-managers of the sale. The company intends to use the proceeds of the deal for accelerating its business growth and operating leverage.

On the other hand, the board of the company also authorized a $5.0 billion share buyback program without a definite expiry. However, stock repurchases will be executed only on the shares currently held by the US Treasury.

AIG consistently aims to pay off its remaining debt of about $25 billion, which has so far been reduced from $182.3 billion government bailout loan taken in September 2008. As well, the company has successfully shrunk the Treasury ownership in it from 92% in January last year to 53% currently.

Following this successful transaction, AIG will be left with a possession of about 13.7% in AIA. Previously, in March this year, the company had raised $5.6 billion from the sale of 1.7 billion shares or 13% stake in AIA, which left the former with about 19% ownership in the subsidiary.

Before this, AIG had raised about $20.5 billion from the initial public offering (IPO) of AIA at the Hong Kong stock exchange in October 2010, much higher than over $15 billion previously expected. However, AIG was then subject to a lock-in period of 6 months and was also required to hold at least a one-third stake in AIA for a year, post the listing.

Nevertheless, AIG had successfully vended off about two-third of its stake in its AIA during October 2010, primarily to cornerstone investors since such investors have a lock-in period of 6-12 months on their investments. The company is now free of any sale restrictions within AIA.

Our Take

While the sale and the subsequent sanction of the stock buyback from the Treasury further contracts AIG’s debt portfolio, it also indicates that the company is under-utilizing its current capital flexibility and its potential liquidity position. Conversely, the slow pace of AIA stake sale also point towards management’s anticipation of seeking a higher value for the growing AIA shares in the future.

Overall, we believe that given the modest acceleration in AIG’s stock price in the recent months along with an impressive first half of 2012 financial results, the Treasury is likely to shed its stake in the company sooner-than-expected, while also generating modest returns from this investment.

However, a further decline of the Treasury’s stake could raise other fresh regulatory challenges for AIG from the Federal Reserve, who still supervises the company. Moreover, intense competition, higher expenses, volatile equity markets, widening credit spreads and reduced interest rates continue to showcase declines that will persistently pressurize the margins.

Thus, we remain on the periphery to analyze the managerial and financial developments at AIG going forward. Consequently, we maintain a long-term Neutral outlook on AIG with Zacks Rank #2, which implies a short-term Buy rating and indicates a slight upward pressure on the stock in the near term.

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