AIG last night returned to the market to trim its stake in Hong Kong-listed AIA Group, following the expiry of its latest lockup on Tuesday. A deal was widely expected, but AIG nevertheless caught investors off guard by selling less than one-third of its remaining stake in the pan-Asian life insurer. At the final price, this resulted in a deal size of HK$15.9 billion ($2 billion), while many market participants had been expecting AIG to sell its entire stake in one go to raise more than $7 billion.
The smaller deal size meant that investors who had been positioning for a sale could no longer be sure of getting an allocation and that prompted a flow of early orders. One observer noted that it is possible there could be a run-up in AIA’s share price today due to the limited number of shares available through the block trade and that in itself may have led to more orders. The immediate overhang on the stock has also been removed, although AIG’s remaining shares will be locked up for another three months.
However, some investors started to wonder whether AIG may in fact be planning to hold on to its remaining stake in AIA, which CEO Robert Benmosche keeps referring to as a good asset that is bringing value to the parent. If that is the case, there may not be much future supply in the stock, giving investors another reason to buy the shares now. AIG will still own about 1.64 billion AIA shares after this deal, which will represent 13.6% of the company and have a market value of about $5.6 billion, based on yesterday’s closing price.
AIG was taking advantage of this situation by offering the shares at a very tight price. The top of the price range even translated into a 1.7% premium to yesterday’s close of HK$26.30, while the bottom represented a 2.1% discount.
The deal comprised roughly 600 million shares, which accounted for about 5% of AIA’s share capital and about 28.3% of AIG’s remaining stake in the company. The shares were offered at a price between HK$25.75 and HK$26.75.
The deal was covered a little over an hour after the 4.40pm launch (Hong Kong time) and there was another inflow of orders after the bookrunners went out with price guidance to investors some 45 minutes before the main order books closed at 9pm (investors on the US west coast and in the Mid-west got another hour to submit their orders). The guidance said that the final price would be fixed between HK$26.30 and HK$26.50 — in other words no lower than the latest market price.
In the end it priced at HK$26.50, which equalled a premium of 0.8% versus yesterday’s close. It is extremely rare for a block trade to price at a premium to the latest close, particularly for a $2 billion deal that accounts for 22 days of trading volume. According to sources, it has happened only once or twice for a block trade in a Hong Kong-listed stock in recent years, and typically that has involved either a pre-negotiated or very small transaction.
The deal was said to have been approaching four times covered and attracted more than 200 investors, comprising a mix of long-only funds, hedge funds and existing shareholders. A deeper breakdown revealed a line-up of high-profile global accounts, financially focused funds, regional money and some high-conviction accounts that understand and like the space and AIA’s role in it. The company has a unique exposure to 15 markets across Asia and it has turned out a strong earnings performance ever since the IPO in October 2010, when it got out from under the shadow of the AIG bailout.
AIA’s share price has also held up relatively well amid the uncertain macro environment and market volatility, and is up 8.4% so far this year and 33.6% since the IPO in October 2010. However, it has come down 9.9% since AIG’s previous sale of AIA shares in early March. That means that even with the tight pricing, this latest transaction was done at a lower price than the HK$27.15 that AIG achieved in March. That deal was priced at a 7% discount, reflecting a significantly larger deal size of $6 billion.
One source said the way the deal was structured makes a clear statement that price is more important to AIG than either the size or timing of its sell-downs. Many had been speculating that the US insurer would want to sell its remaining AIA stake sooner rather than later in order to use the money to buy back its own shares from the US Treasury Department before the presidential election in November.
When it announced the AIA sell-down yesterday, AIG also said that its board of directors has authorised a buy-back of up to $5 billion of AIG common shares from the US Treasury department. However, it stressed that there is no assurance that the Treasury will accept to sell shares through such a buy-back.
The US Treasury Department became the biggest shareholder of AIG after a $182.3 billion government bailout in 2008 and still owns 53%. There is a belief that the government would like to reduce its stake to below 50% before the election, which a buy-back of $5 billion would achieve, but US-based analysts expressed some disappointment last night that the announced buy-back wasn’t bigger. The Treasury Department has already sold AIG shares through three separate market transactions this year and each time, AIG itself has bought a portion of the shares.
The latest sale took place just one day after AIG’s second-quarter results in early August. At that time, the Treasury department sold $5.75 billion worth of shares (including the greenshoe) at $30.50 each, well above its break-even price of $28.73 a share. AIG bought 52% of the deal, at a cost of $3 billion.
Like last time, the deal wasn’t bid out, but rather AIG mandated banks based on existing relationships. Once again, the deal was led by Deutsche Bank and Goldman Sachs, which were joint global coordinators and joint bookrunners, and the only two banks that were actively taking orders from investors. The other seven banks had more passive roles.
Citi and Morgan Stanley were also joint global coordinators, while Bank of America Merrill Lynch, Barclays, HSBC, J.P. Morgan and UBS were joint bookrunners. The line-up was the same as on the March transaction, with one exception: Credit Suisse was replaced as a bookrunner by HSBC. Instead the Swiss bank was given a role as a co-lead.
