|Shares Out. (in M):||0||P/E||0.0x||0.0x|
|Market Cap (in $M):||0||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
The warrants of American International Group, Inc. (AIG/WS) are significantly mispriced due to the long-dating/Black-Scholes phenomenon and significant mispricing of the underlying stock and should be acquired and added to on any weakness, providing the buyer both free non-recourse leverage on AIG and downside risk protection.
Price: $6.43 (52 wk high $24.00, low $6.00)
Price of Underlying (AIG): $22.50 (46% of TBV of $49.18)
Implied Vol: 37%
AIG @ 60% of TBV ($29.50) [9.4x P/E] and Implied Vol @ 37% = $10.67 (65% potential appreciation)
AIG @ 70% of TBV ($34.43) [10.9x P/E] and Implied Vol @ 37% = $13.95 (117% potential appreciation)
AIG @ 80% of TBV ($39.34) [12.5x P/E] and Implied Vol @ 37% = $17.44 (171% potential appreciation)
Background: As part of a series of integrated transactions to recapitalize AIG in January 2011, AIG's Board of Directors declared a conditional dividend on January 6, 2011 to holders of record of AIG common stock as of January 13, 2011, the record date. The dividend consisted of 10-year warrants to purchase up to 75 million shares of AIG common stock in the aggregate at a price of $45 per common share. The warrants were distributed on January 19. AIG common shareholders received 0.533933 warrants for each share of AIG common stock owned. Each warrant entitles the holder to purchase one share of AIG common stock at a price of $45 per share, subject to anti-dilution adjustment for certain events.
Anti-Dilution Protection: The initial exercise price is subject to anti-dilution adjustment for certain events, including (i) future stock dividends, distributions, subdivisions or combinations; (ii) the issuance of below market rights, options or warrants entitling the holder to purchase AIG common stock for a period of sixty days or less; (iii) dividends or other distributions of capital stock (other than AIG common stock); rights to acquire capital stock, debt or other assets (subject to certain exclusions); (iv) per share cash dividends in excess of $0.675 in the aggregate in any twelve-month period; and (v) certain above-market issuer tender offers for more than 30 percent of the then-outstanding AIG common stock.
Fairholme Capital: 24.1 million
Carval Investors: 2.2 million
Goldman Sachs: 1.8 million
Manikay Partners 1.6 million
Key Reference Documents:
1) Warrants FAQ: http://www.aigcorporate.com/investors/warrants.html
2) Q2 Presentation (business unit performance and Deferred Tax Asset breakdown): http://www.aigcorporate.com/investors/2011_August/2Q11_EarningsPresentation.pdf
3) Financial Supplement (detail regarding cap structure and relationship with Treasury): http://www.aigcorporate.com/investors/2011_August/Q22011_FinancialSupplement.pdf
Reasons for Mispricing:
Black-Scholes does poor job valuing long-dated warrants, as implied vol does not take into account the significant mispricing of the underlying AIG common stock nor the multitude of events that can drive value over the next 9+ years
1) The underlying common stock of AIG trades at 46% of Tangible Book Value ($49.18)
2) AIG is very profitable, and is expected to generate $3.15 of EPS (7.1x) for FYE 2011 and $3.00 (8.3x) for FYE 2012 (per CapIQ)
3) Very low expectations for AIG financial performance due to choppiness in AIG historical results
4) Government overhang from residual 77% ownership stake of U.S. Treasury
5) Market not giving AIG credit for addressing key risks from credit crises (i.e. reducing derivative and CDS books by ~90%, securities lending business shuttered, consumer finance business sold)
6) Hidden deferred tax asset of $25.6 billion which may have a PV in the range of $6-8/share
7) The Chartis, SunAmerica and ILFC businesses each have significant independent value and are worth substantially more on a sum of the parts basis (likely 60-80% of BV in aggregate).
Disclaimer: The author of this idea has a position in this security and may trade in and out of this position without informing the readers of this opinion.
1) Market recognizing the underpricing of the warrants, increases implied vol
2) Sale or public offering of equity in one or more divisions (ILFC has made a preliminary filing to sell 20% of equity)
3) Continued performance at Chartis and SunAmerica build investor confidence in earnings power
4) Potential for excess cash flow to be used to repurchase shares, possibly directly from the Treasury, reducing overhang and indicating confidence/stability
5) Bringing deferred tax asset back on balance sheet after continued profitability would provide immediate increase to book value