UPDATE: AIG to Sell More AIA Shares to Raise US$2 Billion

-- American International Group aims to raise around US$2 billion by selling AIA Group shares

-- AIG's stake in AIA will fall to 13.6% from 18.6% after the deal

-- AIG can sell remaining shares after a 90-day lock-up expires, a term sheet says

(Recasts 1st paragraph, pricing in 4th paragraph, AIA's appeal to investors in 7thh-8th paragraphs, previous stake cuts in 5th paragraph, background on share price in the 15-16th paragraphs, and analyst's comments in the 14th paragraph).

 
   By Fiona Law and Prudence Ho 
 

HONG KONG--American International Group Inc. (AIG) is seeking to raise around US$2 billion by selling more shares in former pan-Asian life insurance unit AIA Group Ltd. (1299.HK), in its latest fund-raising exercise to help repay the U.S. government bailout it received during the 2008 financial crisis.

The U.S. insurer also said in a statement it plans to buy back another $5 billion in stock from the U.S. Treasury. AIG has been aggressively buying back shares this year and is expected to buy more from the Treasury this fall, as part of a push that could make the U.S. government a minority shareholder before the November elections and enable the company to fully repay its bailout sooner than expected.

The Treasury Department sold $5 billion worth of shares in AIG last month, its fourth sale so far, reducing the government's stake to 55% and bringing down the amount the government needs to recoup from the bailout to $25 billion.

AIG is selling 600 million shares in Hong Kong-listed AIA in a range of 25.75 Hong Kong dollars (US$3.3) to HK$26.75 each, according to a term sheet seen by Dow Jones Newswires on Thursday. Its stake will fall to 13.6% from 18.6% after the deal.

It sold two-thirds of the company, raising US$20.5 billion, in a Hong Kong initial public offering in late 2010 to help pay off the US$182.3 billion bailout. It sold an additional US$6 billion worth of shares in March, leaving it with 2.2 billion shares in AIA.

The price range represents a 2.1% discount to a 1.7% premium to AIA's closing share price Thursday of HK$26.30. The range is lower than the HK$27.15 price AIG sold the shares at in March, but higher than the Asian insurer's 2010 IPO price of HK$19.68.

AIA's strong fundamentals could help the U.S. company price the shares at a premium, investors and analysts said.

In July, AIA reported its net profit for the six months ended June 30 climbed 10% from a year earlier, while its business value, a key measure of a life insurer's profitability, climbed 28%. More than half of analysts surveyed by FactSet rate the stock a "buy."

Another appeal is that the stock is a member of the Hang Seng Index, so funds that track the HSI have to purchase the company's shares.

AIG will be subject to a 90-day lock-up period once it completes the latest share sale, meaning the New York-based company can't sell its remaining AIA shares during that time, the term sheet said. A six-month lockup period expired Tuesday.

An AIA spokeswoman declined to comment.

AIA shares have been falling since the March sale because of expectations AIG would sell more stock, not because of a lack of confidence in the company's business fundamentals, fund managers say. Its relatively cheaper valuation could also drive up demand in AIG's share sale, they say.

AIA is trading at 1.38 times its embedded value, a measure for investment, lower than the 1.4-1.5 multiples of the two largest Chinese life insurers listed in Hong Kong, China Life Insurance Co. and Ping An Insurance (Group) Co. of China Ltd., analysts said.

But the overhang on the Asian insurer's Hong Kong-listed shares will remain while AIG needs more funds to repay the U.S. government, said Kenneth Yue, senior analyst at CCB International Securities Ltd.

"I expect AIG will continue to sell either a third or half of the remaining stake in AIA, every time when its lock-up period ends, depending on market conditions, until it offloads most of its shares," Mr. Yue said.

After the latest stake cut, AIG will remain the largest shareholder in AIA, owning 1.64 billion shares valued at 43.13 billion Hong Kong dollars (US$5.56 billion) based on its closing share price Thursday.

Deutsche Bank AG and Goldman Sachs Group Inc. are leading the share sale, people familiar with the situation said Thursday, adding Barclays PLC, Credit Suisse Group AG, Citigroup Inc., Morgan Stanley and J.P. Morgan Chase & Co. are also handling the transaction.

Write to Fiona Law at [e-mail] and Prudence Ho at [e-mail]

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