I do not usually make mention of such things but owning 29% of a company capitalized at $5.6 billion dollars is a lot. I would even go as far as to say that in some circumstances that might equate to controlling interest. Prior to "my pal Warren" (Buffett) making an offer to acquire the Burlington Northern Santa Fe Railroad for Berkshire Hathaway (BRK.A) it only owned 23% of the outstanding shares.
It is anybody's guess if Fairholme's Bruce Berkowitz is planning a takeover bid, but since last March when he initiated a 20% position as a passive investment things have changed. He initiated his stake with 20% of some tranches of convertible debt, other AIG bonds, as well as 13 million shares of common stock. Now he has gone activist.
He is obviously much shrewder and sophisticated than me because I cannot see the same upside that he perceives. I have a hard time making heads or tails of the enterprise. The stock has come a long way with a 52 week range from $21.54 to $45.95, closing yesterday at $41.52.
Today AIG announced a return to the debt market with a plan to issue 3 year notes. With rates at rock bottom many companies have decided to take advantage and grab some cash, cheap, while they can, including the likes of Microsoft Corporation (MSFT) and McDonald's Corporation (MCD).
In any event I cannot get my hands around Fairholme's plan, and it is likely that Berkowitz is either on board with the issuance of new bonds or instigated it. The company is still not in the black and has plenty of competition at it's shrunken size.
Mr. Berkowitz, shrewd as he may be, can have this one all to himself (or at least without me) because the debt remains huge, the ROE is negative, as is just about everything else. I may be a contrarian, but this one is too much. Stretching to find something positive in the metrics worthy of note I can point out that the P/S of 0.04 and P/CF of 0.26 is about the lowest I can remember for a going concern.
To invest in AIG at this stage, I think you basically have to go for a ride with Fairholme and speculate they get this one right. Otherwise look elsewhere for opportunity.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value™ and Serious Money. Disclosure: He does not owns shares and/or options in the stocks mentioned at this time.