Posted on 01 Oct 2010
Chief Executive Robert Benmosche of AIG said Thursday that the warrants the insurer plans to issue are a "safety valve" that will give shareholders extra profits if the stock takes off in coming years.
AIG unveiled a plan Thursday to repay the U.S. government by early 2011. Part of the proposal includes giving existing shareholders warrants to buy 75 million AIG shares at $45 each over a decade.
Benmosche said AIG, the Federal Reserve and the Treasury Department each did a sum-of-the-parts valuation of the company to come up with the $45 strike price.
The book value of AIG’s businesses, their earnings potential and risk profiles were considered and a value of $45 to $48 a share was generated, Benmosche explained.
AIG argued for a higher price, but $45 a share was agreed, he added in an interview with MarketWatch.
“The warrants were issued to be fair to current shareholders,” Benmosche said. “We agreed with the government that if the stock got above $45 then shareholders can claw back some of that value.”
“They have an option to take part in some of that upside with these warrants,” the CEO added. “It’s a safety valve.”
Keeping existing private shareholders on board is important to AIG’s exit plan because Treasury will try to sell its 92% stake in the insurer over about two years.
“This represents the need not to alienate existing shareholders,” said Cathy Seifert, an insurance analyst at Standard & Poor’s Equity Research.
“Treasury is going to have to go to market with this stock,” she added. “It has to ensure that there’s a receptive audience when they sell.”
The potential value of the warrants offsets the impact of the dilution existing shareholders will face when AIG’s exit plan kicks in, Seifert explained.
Indeed, when the warrants are included, AIG’s plan may not be as dilutive to shareholders as expected.
“It’s not a complete soaking,” Seifert said.