The $13 billion AMP/AXA SA bid for AXA Asia Pacific has generated a lot of debate about the value of AXA APH’s Asian businesses. The release of the independent expert’s report on the bid helps put that discussion into perspective.

Grant Samuel determined that the proposal was in the best interests of AXA APH’s minority shareholders. It valued AXA APH at between $6.03 and $6.64 a share, compared with the effective offer price of $6.43 a share.

The Australasian component of that valuation shouldn’t be contentious, given that even though the Australian Competition and Consumer Commission blocked National Australia Bank from bidding for those businesses AMP essentially matched the NAB valuation — there was effectively an auction for those operations.

The Asian businesses that will be acquired by AXA SA of France for $9.8 billion ($10.3 billion on an enterprise value basis) are a different matter. The growth prospects for insurance and wealth management in Asia and the relatively scarcity of developed and available businesses in the region means the businesses are more difficult to value and it is easy to be optimistic about their prospects.

The reality, of course, is that there cannot be competition for the ownership of those businesses because AXA SA won’t allow it, which means that the options for AXA APH minorities are to endorse the scheme of arrangement or reject it in the hope of extracting more value in the long term. The Grant Samuel analysis, however, suggests that it could be a very long and not necessarily profitable wait if the minorities rejected the scheme.

The overall transaction metrics are, as Grant Samuel says, “compelling”. The offer is about twice AXA APH’s embedded value and between 17.1 and 20.2 times the value of one year’s business. It is between 21.2 and 23.4 times forecast 2010 earnings and 19.2 and 21.1 times forecast 2011 earnings.

Not surprisingly, given their higher growth profile, the Asian businesses carry even higher multiples within the Grant Samuel valuation, with the multiple of embedded value between 2.5 and 2.7 times, the value of a year’s business between 22.8 and 26.1 times and a multiple of annualised earnings for the six months to June last year of between 28.5 and 31.1 times.

Grant Samuel says those multiples reflect the strategic appeal of the businesses and the uniqueness of the AXA APH Asian portfolio in terms of size, geographic exposure, market position and distribution capabilities in one of the most attractive insurance markets in the world.

It also points out, however, that many of the markets are immature and subject to sovereign risk, that several the businesses aren’t profitable, the key Hong Kong market is very competitive and several of the businesses outside Hong Kong are joint ventured.

Those operations are almost but not quite unique. While the rarity of an Asian insurance portfolio makes it difficult to value those businesses, Grant Samuel did find one very useful reference point. Last year the big UK insurer, Prudential abandoned a $US35.5 billion bid for AIA Group after a revolt by its own shareholders over the price it had been prepared to pay. AIA was subsequently floated.

AIA Group, which was part of AIG before the financial crisis overwhelmed that organisation, is one of the oldest and the biggest foreign insurers operating throughout Asia. It has bigger market positions in most of the markets in which AXA APH operates and in a relative sense has a higher exposure to the faster-growing markets outside Hong Kong.

The Prudential bid — the bid that was too rich for Prudential’s shareholders — valued AIA at 1.7 times embedded value and 25.4 times the value of new business. AIA owns almost all of its Asian operations outright and doesn’t have a majority shareholder.

The numbers and the circumstances tend to reinforce the view that AXA SA has imputed, and will pay, a very full price for the Asian operations.

As Grant Samuel says, that could be regarded as the cost to AXA SA of ridding itself of the undertakings it gave when it first invested in AXA APH, which effectively granted the Australasian entity a call option over any proposed acquisition AXA wanted to make within Asia.

The reality that a large part of its consideration for the operations is shares in AXA APH that it acquired cheaply would also allow it to regard the valuation issue differently to an arm’s-length bidder.

Nearly two-thirds of the value of AXA APH’s Asian operations is tied up in its more mature Hong Kong business.

Among the non-Hong Kong assets within AXA APH is one that has attracted a lot of attention, its interest in a joint venture in China. Last year Industrial and Commercial Bank of China paid about $180 million for a 60% interest in the AXA Minmetals joint venture.

While that deal does give the joint venture access to a vast and national distribution network, AXA APH has only a 13.5% interest in that business, which isn’t profitable, and the ICBC deal valued that interest at only about $40 million. It may be a very long time, if ever, before that business is material within the context of AXA APH.

The AMP bid and the on-sale of the Asian operations to AXA SA not only requires shareholder approval but will also have to be approved by Wayne Swan.

Given the messy political balance in Canberra his attitude to the deal isn’t predictable, although there is no conventional national interest issue involved given that the Asian businesses are offshore and were privately developed and owned. AXA APH shareholders (most of them originally policyholders) funded the development of the portfolio and it ought to be their decision to sell, or not.

The bid — which can’t succeed without the sale of the Asian businesses — would also considerably bulk AMP up and, in wealth management, give it the scale to compete more aggressively with the major banks, with which Swan has a fractious relationship. AMP has been hammering away at that point — and its own potential to become a “fifth pillar” within the financial system — in its lobbying in support of the offer.

*This first appeared on Business Spectator.

Peter Fray

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