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Threat of IPO could heat up bidding among United Guaranty's possible acquirers


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Threat of IPO could heat up bidding among United Guaranty's possible acquirers

'spartial spinoff of UnitedGuaranty Corp. could thaw the frozen insurance IPO market — if itisn't bought outright first.

AIG firstdisclosed plans to issue part of United Guaranty's common equity on Jan. 26,when it revealed a restructuring strategyto become leaner and blunt demands that it transform into three separate companies.An IPO of 19.9% of United Guaranty would be "afirst step towards a full separation," AIG said in a press releaseannouncing the restructuring plan. On March 30, United Guaranty a registration statementfor an undisclosed number of common shares.

ButAIG fielded bids to acquire all of United Guaranty soon after announcing thatthe mortgage insurer would be separated, according to a recent . The possibility of fullbuyers suggests that the IPO's role, in addition to gradually floating thecompany, could also be to keep potential buyers honest, Sanford C. Bernsteinanalyst Josh Stirling said in an interview.

"Ifsomeone wants to buy it from us, we have a credible alternative so we can thennegotiate a better price from the acquirer," Stirling said of AIG. "Thebig picture is, really, the IPO is kind of a trial balloon for a full sale."

Onthe other hand, if a deal does not materialize before the public offering, theIPO could establish a fair market price for United Guaranty's shares. The bidsof interested companies would then work from the shares' trading price, and thetypical public buyout premium of 30% would be expected, Stirling said.

Despiteinterest in the entire business, AIG is still planning to offer 19.9% of thecompany in the IPO, Jon Diat, a company spokesman, said in an email. Hedeclined to comment further on the offering.

TheIPO market has been exceptionally cold for the past year, S&P Global MarketIntelligence data shows. Initial offerings for insurers have been even lesscommon, with none inthe past two quarters. In all of 2015, only Conifer Holdings Inc. and went public.The only financial company to go publicso far in 2016 has been BatsGlobal Markets Inc., which began trading April 15.

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Thewave of volatility from August 2015 through the first quarter of 2016 wasbehind the IPO market shutting down, Kathleen Smith, a principal at RenaissanceCapital, said in an interview. Renaissance manages IPO-focused exchange-tradedfunds.

"Investorsbasically sold off anything they considered too volatile and went into muchsafer places, which tend to be larger companies in safer sectors, likeutilities," she said.

Manyof the companies that went public in 2014 and 2015 traded below their IPO priceduring this period, she explained. Since the market bottomed out on Feb. 11,she said, that group of newly public companies has outperformed the S&P500, which was up 1.88% for the year as of April 13.

UnitedGuaranty's partial offering would likely see a lot of demand from investors,Stirling said. "There's an obvious catalyst, which is that they'llprobably sell the rest of the company," he said.

Smithnoted that the stocks of other public mortgage insurers, including and , are innegative territory for the year. On the other hand, she said, the housingmarket has shown improvement.Housing starts were up by double digits in February compared with 2015, whilethe S&P/Case-Shiller U.S. national home price index rose 5.4% in January.

Entertaining full bids for a company alongside an IPO is notuncommon, Smith said, and even a company running a so-called dual-track processwould not file a prospectus without an intent to go public. InOctober 2015, payments processor TransFirst Holdings filed an IPO even as its private equity owner, VistaEquity Partners, sought out buyersfor the entire business. TotalSystem Services Inc. emerged as its buyer in , and the closed April 1 without anypublic trading of TransFirst's stock.

While letting the shares trade to establish a market pricemight raise the baseline for an eventual buyout, agreeing to a good offer rightaway also makes sense, Bernstein's Stirling said. United Guaranty is notstrategic to AIG's core businesses, and selling it in one deal would quicklyfree up capital to be used for share buybacks, he said.

"You might as well sell the good stuff, because thegood stuff is what will sell," he explained. Bermuda-based reinsurers, forexample, would be logical owners thanks to the lower taxes they pay. They alsomay be interested in diversifying into mortgage insurance to hedge against thesoftening reinsurance cycle, Stirling said. Arch Capital Group Ltd. made such a move in 2014 withthe acquisitions of CMG MortgageInsurance Co. and PMIMortgage Assurance Co.

"Why don't I go be a mortgage insurer who's going tomake a lot of money for the next five or 10 years, until there's anotherhousing crisis," Stirling said of an offshore reinsurer. "[UnitedGuaranty] would be better off as part of a larger organization with inherentcapital synergies."