Source: Kuwait’s Investment Authority Commits $1 Billion to AIA IPO

By and | October 4, 2010

American International Group Inc received a $1 billion commitment from Kuwait Investment Authority for the IPO of its Asian unit, the first major investment inked before the mega offering’s roughly $15 billion launch.

KIA, the country’s sovereign wealth fund, is among the major global institutions that have signed up as cornerstone investors ahead of AIA Group Ltd’s IPO, according to a source on Monday. The source had direct knowledge of the matter but was not authorized to speak publicly as the deal has yet to launch.

AIA’s IPO is set to start on Tuesday, with shares expected to start trading on Oct. 29. AIA IPO is likely to be world’s second-largest this year after Agricultural Bank of China Ltd, which raised $21.9 billion in Hong Kong and Shanghai in July.

The planned listing comes after a takeover attempt by British insurer Prudential Plc collapsed in May over price disagreements.

The key question for AIG is whether the public markets will give it the $35.5 billion valuation originally offered by Prudential. Prudential later dropped the offer to $30.4 billion just before the bid failed.

“Considering that some of the Chinese insurers are trading more than 2 times embedded value, I think AIA can get overall value north of $30 billion,” said Sally Yim, vice president at Moody’s Investors Service in Hong Kong and senior analyst who covers Asia-Pacific’s insurance industry.

Prudential’s initial $35.5 billion bid for AIA was pitched at 1.67 price to embedded value. Embedded value is a measure commonly used to gauge the value of insurance companies that includes the present value of future profits from long-term insurance contracts.

The FT was the first to report KIA’s commitment. The paper also said that the only way KIA agreed to the investment was because AIG “was forced” to lower its valuation to $30-$32 billion from $35-$37 billion.

Research reports have put the valuation range of the offering from $29.5 billion to $38.6 billion, which gives an embedded value range of 1.1 times EV to 1.7 times. Ultimately, the valuation is determined by the company and its underwriters, who gauge the specific embedded value figure that mutual fund investors are comfortable with.

A valuation that’s too high raises the most money but risks an opening day flop. Too low, and the banks are blamed for not raising enough.

“AIA is operating in some of the more mature markets like Singapore and Hong Kong. They have a little bit of a ‘China story’, but not as much as the Chinese pure plays,” Yim said.

An AIA spokeswoman declined to comment and KIA could not be immediately reached.

Cornerstone investors, including Middle East wealth funds KIA and Qatar Investment Authority, played a key role in the success of AgBank’s IPO, accounting for more than half of the Hong Kong offer.

But such investors are only likely to buy about 15-20 percent stake in AIA offer, bankers have previously told Reuters.

AIA has yet to decide the exact stake it will sell in AIA, but bankers have said the U.S. insurer is expected to offer around half of the company to the public market.

AIG, nearly 80 percent owned by the U.S. government, is disposing of assets to repay taxpayers who committed $182.3 billion to prop up the insurer during the financial crisis.

Global equity markets rallied in September, historically the weakest month for stocks, driven by a robust Chinese economy and expectations of further monetary easing by developed economies’ central banks to support a shaky recovery.

“The recent upside momentum in the stock market will be favorable for AIA’s IPO,” Moody’s Yim added.

Cornerstone investors agree to buy into an IPO before it prices. They are barred from selling their shares for six-month lock-up period, helping build confidence in the offer before it goes to institutional investors.

AIG will hold at least a 30 percent stake in its AIA for a year after AIA listing in October, the IPO term sheet showed earlier.

(Additional reporting by Vikram Subhedar; Editing by Chris Lewis and Lincoln Feast)

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