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The stake sale will help AIG repay part of the debt it got in a 2008 government bailout.
AIG's stake in its former Asian arm has dropped to about 18.6 percent, or about $7.8 billion in value, after the block deal, which was Asia's second-biggest selldown behind Vodafone plc's $6.6 billion block sale in China Mobile Ltd in 2010, according to Thomson Reuters data.
The U.S. insurer, which received a massive $182 billion bailout in the 2008 global financial crisis, is barred from selling any more shares in AIA till September 4 this year, AIG said in a statement.
AIG sold 1.72 billion ordinary shares at HK$27.15 each in a block sale to unnamed institutional investors. The shares were initially offered in a range of HK$27.15-27.50, a discount of up to 7 percent to AIA's closing stock price on Friday.
AIA shares fell as much as 8.4 percent to HK$26.75 as trading resumed on Tuesday, compared with a 1 percent drop in the benchmark Hong Kong share index.
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"The AIA stock is reacting on the back of the huge placement," said Colin Ng, head of equities at Barings Asset Management.
"It was widely known to the market that AIG will unwind its position at some point. We hold the stock for the fundamental value and the earnings potential it has," Ng, who helps manage about $8 billion in Asia, including AIA stock, said.
BOOST TO BANKERS
AIG was forced to spin off AIA, widely considered its crown jewel, and other assets following the bailout by the U.S. government.
Now Asia's third-largest insurer, AIA has built a sprawling and successful business across the region, with an army of hundreds of thousands of agents.
AIG expects to use the net proceeds to reduce the balance of the U.S. Treasury Department's preferred interest in a special-purpose vehicle that holds the AIA shares. As of last month, those preferred interests were worth about $8.4 billion.
The Treasury also owns 77 percent of AIG's common stock following the bailout.
The selldown is a huge boost to equity capital markets bankers, who faced a drought of initial public offerings in the new year despite a strong run-up in stock markets in Asia.
Deutsche Bank and Goldman Sachs are the "active" joint global coordinators, according to two sources with direct knowledge of the process. Citigroup and Morgan Stanley were taking "passive" roles in the current AIG sell-down, the sources, who did not want to be named because of the sensitivity of the matter, said.
All four banks led AIA's $20.5 billion IPO in 2010.