AIG – Deal Changed – Likely to remain NOT government owned

Sep 19, 2008 by Sam

AIG is really smart or really lucky or Both. As I suspected rules are rules and even the Fed would require a shareholder vote on taking a majority stake in the company. In addition it is unclear as to what the warrant price will be ( or if there will be no price ) – remember AIG is not giving the Fed a stake in the company in exchange for the loan ( and that is NOT what the shareholders will be voting on)

Rather they will be issuing a Warrant. The price, time etc are not known. It should be noted that the SEC filing is slightly different then the Federal Reserve Statement The Fed stated  ” The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.” The SEC filing by AIG states    ” In connection with the revolving credit facility, AIG issued a warrant to the Board of Governors of the Federal Reserve (“Federal Reserve”) that permits the Federal Reserve, subject to shareholder approval, to obtain up to 79.9% of the outstanding common stock of AIG (after taking into account the exercise of the warrant). AIG anticipates calling a special meeting for such purpose as promptly as practicable. ”  The AIG filing indicates an exersize of a warrant is required ( at some price) while the Fed indicates it will “receive” a 79.9% interest- while not indicating that the exersize of a warrant is in fact required.

Regardless, of the exersize price of the warrant and whether the difference of the SEC filing by AIG and the Fed Statement are in fact just a result of “lawyer errors”, One thing is clear. AIG has its money and it has some really good wiggle room and more importantly, it has  time . As we all know the calling of a shareholder meeting does not typically take a day or two.. It can take weeks or longer (see Bear sterns- over one month ) ; meanwhile AIG has the cash and the time. If, by the time the meeting rolls around (“as promptly as practiable”  in other words :- as long as possible without making the Fed angry)  the markets have recovered then there is no reason for the shareholders to approve the warrant ( it’s unclear as to what occurs if the shareholders in fact dont approve the warrant- is the loan due back to the Fed the next day ? ) Either way, there is good potential that in fact AIG shareholders will reject the deal and  in fact share the spoils of the recent actions to shore up the financial system. If the market run continues and credit markets stabilize a bit – AIG will find an alternative buyer or lender- (unlike JP Morgan Bear/Sterns which had some protection including an option on the Bear building in case Bear shareholders rejected the deal- the Fed does not seem to have such protections)  Which is why AIG is really one of the lower risk buys in the market today. They have downside protection ( at the expense of 80% dilution) and they have upside as the shareholder vote could be taking place with the siuation entirely different. I suspect that in fact the latter will occur and AIG will NOT be owned by the Fed. Obviously that assumes overall market conditions improving.