ÌìÃÀÍøÕ¾´«Ã½´«Ã½

As American International Group Inc. prepares to shed two big units, it looks set to follow the same path as Citigroup Inc. out from under the U.S. government’s wing.

The government is likely to follow an exit strategy similar to what it has used so far with Citigroup to untangle itself from ÌìÃÀÍøÕ¾´«Ã½´«Ã½, a source familiar with the matter said.

ÌìÃÀÍøÕ¾´«Ã½´«Ã½ has struck a deal to sell its Asian unit, American International Assurance (AIA), for about $35.5 billion, and the company is talks to sell foreign life insurance unit American Life Insurance Co. (Alico).

The two companies are expected to fetch about $50 billion overall, which could allow ÌìÃÀÍøÕ¾´«Ã½´«Ã½ to pay down almost all of its Federal Reserve Bank of New York credit facility.

But that would still leave the government holding roughly $47 billion in equity investments, including the amount drawn under a $30 billion equity line, and a nearly 80 percent stake in ÌìÃÀÍøÕ¾´«Ã½´«Ã½, to which it has committed up to $182.3 billion in taxpayer funds.

Citigroup was in a similar situation. It got $45 billion under the U.S. Troubled Asset Relief Program and converted a portion of that into common stock. That common equity started out as about 34 percent of the company, but is now about 27 percent after subsequent share issues by Citigroup.

The bank repaid about $20 billion in December, and the government is looking to sell its shares, but only if it can do so at a profit.

Under Chief Executive Robert Benmosche, ÌìÃÀÍøÕ¾´«Ã½´«Ã½ may head in a similar direction.

An exit strategy could involve converting existing Treasury preferred shares to common stock, and then selling them in the market over time, the source said.

That process would probably take years, the source said, requesting anonymity because these discussions are not public.

Such a strategy would increase Treasury’s equity stake in the insurer above its current 80 percent level until the department could sell the shares, the source said.

Benmosche, meanwhile, plans to rebuild ÌìÃÀÍøÕ¾´«Ã½´«Ã½ around general insurance business Chartis and its U.S. life insurance and retirement services operations, instead of trying to sell off everything as his predecessor, Edward Liddy, was planning to do.

After taking over in August, Benmosche halted efforts to sell Chartis, which was originally in line for a sale or IPO after the divestment of AIA and Alico.

He has also decided against a plan to securitize about $8.5 billion of U.S. life insurance policies and stopped auctions of some businesses, including ÌìÃÀÍøÕ¾´«Ã½´«Ã½ Edison Life Insurance and ÌìÃÀÍøÕ¾´«Ã½´«Ã½ Star Life insurance in Japan.

Because Benmosche gets $4 million of his $7 million annual salary in ÌìÃÀÍøÕ¾´«Ã½´«Ã½ common stock, he has a stake in seeing the company survive and prosper. For now, though, the insurer is struggling to find its footing. It posted a quarterly loss of $8.9 billion on Friday.

The next big sale on the horizon appears to be Alico, which is expected to go for roughly $15 billion to MetLife Inc . The parties, however, have not yet struck a deal, which hinges on a tax issue being looked into by the Internal Revenue Service.

Other than that, ÌìÃÀÍøÕ¾´«Ã½´«Ã½ is looking to sell about a dozen small assets, such as consumer finance businesses and aircraft portfolios from International Lease Finance Corp. These sales, however, are not likely to put much of a dent in the $182 billion that it is trying to repay the government.

“The administration supports the board of directors at ÌìÃÀÍøÕ¾´«Ã½´«Ã½ in its decision to sell (AIA) and recognizes this is a major step in the ÌìÃÀÍøÕ¾´«Ã½´«Ã½ restructuring plan to de-leverage, de-risk and pay back taxpayers,” Treasury spokesman Andrew Williams said.

ÌìÃÀÍøÕ¾´«Ã½´«Ã½ declined to comment.

LONG WAIT

The proposed sale of AIA to UK’s Prudential Plc is a huge step in ÌìÃÀÍøÕ¾´«Ã½´«Ã½’s efforts to pay back the government and a feather in Benmosche’s cap.

ÌìÃÀÍøÕ¾´«Ã½´«Ã½ will use the cash portion of the deal proceeds to pay the Fed $16 billion for the bank’s preferred interest in a special purpose vehicle that holds AIA. With the remaining $9 billion in cash from the deal, it will pay down the Fed’s credit facility, which had an outstanding balance of about $25 billion.

ÌìÃÀÍøÕ¾´«Ã½´«Ã½ also intends over time to sell the $10.5 billion of Prudential securities it will receive for AIA, using the money to further pay down the Fed debt.

While the Fed is first in line to get paid from the AIA sale, it will not see any of that money until the deal closes, which is planned for the end of the year.

“We decided that a sale to Prudential enables ÌìÃÀÍøÕ¾´«Ã½´«Ã½ to realize value on a faster track to repay U.S. taxpayers,” ÌìÃÀÍøÕ¾´«Ã½´«Ã½ Chief Executive Robert Benmosche said in a statement.

Even that faster track, however, is likely to bring a long wait.

(Editing by Lisa Von Ahn) (For more M&A news and our DealZone blog, go to http://www.reuters.com/deals)

Topics USA ÌìÃÀÍøÕ¾´«Ã½´«Ã½