Posted on 03 Jun 2010
When the U.S. government decided in March 2009 to acquire shares in the crown-jewel asset of bailed-out American International Group Inc., it was prepared to wait for favorable market conditions to facilitate a sale of the unit.
U.S. taxpayers now have to wait several more months -- amid markets that are going through another bout of turmoil -- to find out how much they can recoup from AIG's largest Asian life-insurance business after a failed $35.5 billion acquisition by British insurer Prudential PLC (which is unrelated to Prudential Financial Inc. of the U.S.). On Wednesday, Prudential confirmed it had terminated its agreement for the business, known as American International Assurance or AIA Group Ltd., and would pay AIG a breakup fee of £153 million, or about $224 million.
The scrapped deal has added more uncertainty to AIG efforts to repay its $132 billion taxpayer-funded bailout, and analysts say it is unlikely that alternative options for AIA would value the entire business at more than Prudential's initial $35.5 billion deal. AIG could sell roughly half of AIA in an initial public offering, which was earlier expected to raise $15 billion to $20 billion, and sell additional shares in secondary offerings later.
AIG, which early this year was preparing for an IPO of AIA that would have launched in April or May, viewed a sale of the unit to Prudential as a riskier option with many hurdles, according to people famliar with the matter.
It agreed to the deal in March because it attached a higher value to AIA and would enable AIG's largest creditor, the Federal Reserve Bank of New York, to be repaid more quickly.
The New York Fed last year converted $16 billion of its AIG debt into preferred shares in AIA. It holds $9 billion preferred shares in another AIG unit and is owed an additional $26 billion by AIG, which has until September 2013 to repay its loan.
The failed deal is a setback for AIG Chief Executive Robert Benmosche, who had pushed for the sale of AIA to Prudential but was outvoted by AIG's board this week. The board is composed mostly of individuals elected after the government took a 79.8% stake in the company.
AIG board members had worried that a revised deal could still be rejected by Prudential shareholders, which would make it difficult for AIA to fetch a valuation of more than $30 billion in an IPO.
Representatives of the New York Fed supported the decision by AIG's board, according to people familiar with the matter.
While Mr. Benmosche recently said the company now has several options to consider regarding AIA, analysts say the most viable one remains the IPO, which could be launched this October or November. Sales of individual parts of AIA could take much longer and meet regulatory hurdles.
"There's no doubt that AIG's restructuring plan is now more subject to market conditions, and markets have experienced significant volatility, which could present challenges to executing an IPO," said Angelo Graci, a managing director at Chapdelaine Credit Partners.
To revive its planned IPO, AIA will need to update the financial information provided in an early listing application that was sidelined when it agreed to the deal with Prudential in February. The global stock-market environment remains rocky amid concerns over the extent of banking and sovereign-debt problems in the euro zone.
And a flurry of share offerings for Chinese banks expected in the next few months, including an IPO for Agricultural Bank of China Ltd. that could raise up to $30 billion, is likely to weigh on demand among institutional investors for exposure to Asia's financial sector.
AIG may choose to alter AIA's structure, by potentially divesting it of slower-growth businesses to enhance the unit's appeal to investors.
In the meantime, AIA will face some challenges going it alone. For one, Prudential was able to peer into AIA's books as part of its due-diligence process.
That gives Prudential more insight into its competitor's business than it had before the deal was announced.