Perusing through the 13D filings in Barron's November 29 issue I came across news reported by InsiderScore.com regarding American International Group, Inc. (AIG). It was noted that "Fairholme Capital raised its holdings to 39,990,099 shares (29%), by buying 1,765,900 shares from Nov. 5 to Nov. 16 at prices ranging from $41.72 to $43.59."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.
Reader Comments (Page 1 of 1)
11-30-2010 @ 4:50PM
william lindblad said...
Carl Ichan owns a lot that did not go as intended and that list is mighty long including even the small people like myself. Of course, there are other like Templeton that got it right. I do not know enough about AIG to really voice an opinion other than it had some serious management problems and if that has been cleared up?
If Mr. Berkowitz is on to something I doubt that he is going to take out a front page ad and let everyone in on it. I mean, really, would you?
12-04-2010 @ 12:04PM
Joe Eifrid said...
I see that Fairholme reported another 165,000 shares bought at market since since December 1st.
I don't get it either. I understand the govt will own 92.1% of AIG after they convert their preferreds to common. That is major dilution. The govt also plans to sell shares (1.66 billion of them) in the market over the next two years after they are issued. The AIG plan of 1.655 billion shares equates to the US needing to sell their shares for $30 each to break even. This is from the AIG plan;
>>>Retiring AIG's Remaining TARP Support and Series C Preferred Shares. Today, AIG has approximately $49.1 billion of TARP preferred shares outstanding. Under the plan, the U.S. Treasury is expected to receive approximately 1.655 billion shares of AIG common stock in exchange for the $49.1 billion of TARP Series E and Series F preferred shares and the Series C preferred shares currently held by the AIG Credit Facility Trust. In addition, AIG will issue up to 75 million warrants with a strike price of $45.00 per share to existing common shareholders. Upon the exchange, the U.S. Treasury will own 92.1% of the common stock of AIG. The exchange will not be executed until the FRBNY credit facility is repaid in full. After the exchange is completed, it is expected that over time the U.S. Treasury will sell its stake in AIG on the open market.
12-04-2010 @ 12:07PM
Joe Stocks said...
partII - Now think about this....the US want to sell their shares over two years. There are about 250 trading days each year. Over 2 years that's 500 trading days. The average trading volume for AIG over the last 3 months is about 4 million shares a day. The govt has 1.66 billion shares to sell. That is 3.32 million shares each and every single trading day for two years.How is that not going to affect prices downward??
I keep trying to see this through Fairholme's eyes as to what possible upside they see that they want to own 30% now but yet see their ownership diluted so severely.
My back up the envelope calculations value AIG after the dilution at about $25-30 at best. Obviously others must see it that way or why else would AIG be issuing so many shares to the US considering the current share price that the govt only needs $30 a share to break even?
No current position. I would be short but Fairholme's aggressive buying has be thinking I must be missing something. I felt this same way when AOL bought Time Warner. I thought surely I must be missing something and did not short AOL. Of course AOL eventually went into the toilet and the merger is now in history as one of the worst ever.