Time pressures and the market crisis will drive down prices.
AIG is in a race against time to sell off assets to repay government loans currently totalling $123bn (£74.7bn). Although faced with formidable obstacles, the AIG asset sale could be completed, if the price is right.
The insurer is undertaking a massive asset sale – about half the company – and finds itself in a highly unattractive negotiating position. It is a forced seller in a falling market, under pressure to complete quickly. This is compounded by the fact that potential buyers will not find it easy to raise capital in current financial conditions.
The time pressures include the countdown on its government loan and the eroding effects of loss of staff and of customers. The term of the US government loan is two years. That should usually be enough time; however, the government loan attracts a high interest rate of three-month Libor plus 8.50% – far more than AIG is accustomed to paying on its corporate debt. The longer the loan remains outstanding, the more expensive it will be.
Meanwhile, rival companies are making active efforts to poach key AIG staff and have not been shy about targeting AIG clients. So AIG is attempting to sell wasting assets.
There are a number of factors in AIG’s favour, however: insurance industry buyers may also want to conclude deals quickly. The credit market shows signs of turning, which will help buyers raise funds for acquisition. Regulators are also likely to quickly wave through the sale of AIG assets.
One tactic for buyers would be to hang tough, waiting to pick up assets cheaply as the pressure on AIG intensifies. This tactic could be used by private equity companies, but insurance buyers are unlikely to avail themselves of it. Trade buyers will be concerned to preserve the franchise of the businesses they are buying: they would be motivated by a speedy purchase, while key staff remain on board. Even large mergers and acquisitions can be agreed quickly and due diligence can be completed, with focused effort, in three or four weeks. Regulatory approvals usually take longer, but regulators both in the US and internationally may expedite matters in the light of their governments’ efforts to solve the credit crisis.
Companies such as Allianz, Munich Re and the Prudential are actively interested in the opportunities offered by the AIG asset sale. AIG’s Asian assets, for example, offer an exceptional chance to access the fast-growing Asian market. Companies could raise the necessary cash by rights issues and, at the time of writing, the credit market shows signs of easing.
AIG is unlikely get a good price, however. Life insurers, for example, are trading at a substantial discount to their embedded value, compared with a premium over the past few years. AIG could turn out to be selling at the bottom of the market: if buyers believe that, that is precisely why the asset sale could get done.
• AIG is in an unenviable position as a seller and is unlikely to command good prices for the assets it sells.
• Insurance companies are likely to want to take advantage of the opportunity, so AIG could well succeed in selling off major assets.
• Expect to see major disposals announced within the next six months. If not, something has gone badly wrong.