Oct 22nd 2010, 14:53 by The Economist online | HONG KONG
HAVING twice botched the sale of AIA, AIG’s valuable Asian life-insurance arm, America’s Treasury was not about to screw up a third time. Intent on offloading AIA before next month's mid-term elections, the company’s initial public offering (IPO) closed on October 21st, raising $17.85 billion. It was met with huge demand. The buyers have more to celebrate than the sellers.
A prospectus for the deal was released in Hong Kong on October 18th with an unusually narrow price range of HK$18.38-19.68 ($2.40-2.50) per share. The price ended up at top of this range, as a small group of “cornerstone” investors committed themselves to buying large numbers of shares. These investors, which include Kuwait’s sovereign-wealth fund and a couple of Hong Kong tycoons, had no illusions about the pressure the seller was under and were in no mood to be generous. The result was a tight cap on the price, regardless of demand.
The appetite for AIA shares was indeed voracious. Buyers apparently included Chinese state-controlled entities which did not want the publicity of cornerstone status. The Asian order book was closed almost as soon as it opened. Faced with such high demand, the offering could have been pulled and resubmitted at a higher price, which would have raised billions of dollars more for the taxpayers who footed the bill for AIG’s bail-out. But delay would also have pushed the listing beyond the election date, depriving the American administration of useful evidence that it is cleaning up after the crisis.
Other things being equal, a post-offering leap in the share price would prove that AIA had been sold cheaply. To mute this embarrassing possibility a novel provision in the prospectus allows the amount of shares issued to be expanded not once, which is common, but twice. This could hike the size of the offering by 38%, dumping an extra HK$43.8 billion-worth of securities on the market. (AIG must retain a stake of just over 30% for at least a year.)
New investors have more to cheer. The company’s valuation, $30.5 billion, is well under 15 times earnings for a company with strong growth potential (China Life has a price-earnings ratio of 24). AIA has a uniquely broad exposure to Asia’s growing markets, much of which was acquired decades ago. The end of AIG’s control stops damaging uncertainty over AIA’s future, which has caused market share to fall in some places and opportunities to be passed over in others, notably Vietnam. An aborted effort by the Treasury to sell AIA to Prudential, a rival British insurer, resulted in the transfer of confidential data. Management was this week peppered with questions about the low productivity of AIA’s agents. Their answer—that results can only get better—may well be true.
AIA will also end up with a better Western-style governance structure. Equity will be spread among minority shareholders, a rarity in Asia. Big investments in the IPO by several Asian sovereign-wealth funds should give their governments an incentive to boost AIA’s market access in their countries. That is particularly relevant in China, where AIA has for years been bottled up in a small handful of cities. The American government did not much benefit AIA; ties to Asian governments might.
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