Common shareholders who own the stock when the U.S. converts its AIG preferred shares to common will get warrants entitling them to 75 million more shares at $45 apiece, according to the government's divestiture plan unveiled last month.
Holders of the warrants will have 10 years to exercise them, and their long-dated nature and the volatility of AIG's shares mean the warrants will immediately have a value of about $8 to $9 a share, even though the stock is currently below the $45 strike price, UBS said in a note to clients Monday.
AIG shares rose 86 cents, or 2.1%, to $42.33 in morning trading. The stock rose about 40% this year before Monday's trading as investors grew more confident the insurer would be able to stand on its own absent government support.
Without the warrants, UBS said AIG had a fair value of about $38 to $39 a share when the dilution from the government's planned conversion is factored in. That conversion is expected by the end of next year's first quarter.
UBS kept its official, 12-month rating on the shares unchanged at "neutral." The firm raised its 12-month price target on the stock to $45 from $40.
The exit plan, which won the blessing of major credit-ratings firms before it was announced on Sept. 30, would see the government's ownership stake in the company increase to 92.1% from 79.8% currently. Then, the government would sell the stock over time in a process similar to its ongoing liquidation of Citigroup Inc. (C) shares.
UBS wrote Monday that investors needn't worry the government sell-off will dampen the stock price substantially. Citi shares are down 19% since the U.S. Treasury first announced plans to liquidate its holdings of the bank, compared with the 15% decline for the Standard & Poor's index of financial firms, UBS said.
Despite revenues of $96 billion last year, AIG has far fewer analysts following it than many publicly traded firms half its size. FactSet, the financial data service, lists four other firms with ratings on AIG shares.
That's down from 21 ratings three years ago. Most analysts dropped or suspended coverage after the insurer's near-collapse in 2008 and the government's intervention, which diluted the holdings of existing shareholders. Before a 1-for-20 reverse split of AIG shares in July 2009, the stock traded below $1.
Of the analysts who now track the stock alongside UBS, two have "hold" ratings similair to UBS's "neutral." The other two advise investors to sell, according to FactSet.