The AXA affair is one of the most remarkable and disturbing takeovers in Australia’s history. Never before has a company hidden in obscure material that its key asset (the Asian business) is growing at a rate that conceivably could double its value in two-and-a-half years. Most shareholders will make their decision without this information being communicated to them via the takeover documents.

The fact that Australia’s AXA is about to be a stakeholder in a “local” company in China, which transforms its outlook, has also not been spelled out to shareholders. Neither action is deliberate concealment, but rather honest, well-meaning people who correctly measured the short-term benefits of the bid but who did not think about the long-term implications of these and other recent events This morning’s statement from Grant Samuel compounds the mistake: they reiterate their short-term conclusion that the bid is fair (that is, the shares will fall if it is blocked) — which is not at issue — but do not tackle the long-term questions.

Never before has the controversy not been about the up-front bid but rather the side deal — the sale of the AXA Australia’s Asian assets for around $10 billion. In theory they could be worth $20 billion within a short time. (The new asset growth figures include minority interests, so it may take longer to double, but the total silence on this vital issue is stunning.)

Never before have we had a tussle over actuarial values rather than profits which has left most journalists (Terry McCrann is a notable exception) and certainly the regulators absolutely out of their depth.

Never before has a minister of the crown, Treasurer Wayne Swan, had to remove a 1995 government decree as part of the approval of a takeover. He may be more influenced by the political ramifications of government’s recent ‘anti-business’ decisions in banking and possibly the ASX takeover than the national interest (Swan’s defining AXA act, February 8).

If this deal goes though without more communication to AXA Asia Pacific shareholders about their long-term prospects, Australian regulators, the directors involved, and the independent experts should hang their heads in shame.

But today I want to introduce you to a totally different aspect of the bid — a court case which also is not known to shareholders. First I must alert you to the difficulty and danger about writing about court cases close to a decision — everyone has an axe to grind. But I will do my best.

Way back in the in the 1990s it seems that the forerunner of AXA in Australia, National Mutual, issued a series of policies which gave the holders the right to convert the investments behind those policies to cash and shares three days after the event on the markets. So if the share market slumped you went to cash. If it jumped you went to shares. Because you were making the decision after the facts were known you could make a fortune with no risk. AXA later froze the rights and settled most on the policies, but two investors Scott Tyne and Garrick Hawkins, decided to take National Mutual/AXA on via the courts. Back in 2008, they got a decision which confirmed they had the three day conversion rights, but the case was then delayed. It now goes before a judge around March 7.

As best as I can understand, AXA will put before the judge a series of defences and the investors will try and have those defences thrown out either on the basis that they are not legal or that they have not been used before and so it’s now too late. If the judge decides to let AXA put those defences the case will not be decided until the second half of 2011 or later. But if the judge throws them out, the case will be about damages and the investors are claiming between $1.3 billion and $1.9 billion. Given that AXA’s Asian business rose in value by $2.7 billion in just six months (to December 31) that’s chicken feed to the total group, but anything near $1 billion is very significant to AMP given it could represent around a quarter of their Australian asset consideration. Both AMP and NAB have looked at this case as part of due diligence and decided that AXA is sufficiently provisioned, but those provisions assumed a much lower settlement.

If – and I can’t emphasise “if” too strongly – the judge throws out the AXA defences, then in the next few weeks he could well give some indication of likely damages to encourage the parties to settle. But his final decision is not likely until after the takeover is resolved. I make no predictions. Because it’s not disclosed in the takeover documents, AMP will not have done an indemnity deal with the French, but if they are nervous they should talk with the French who have just seen the assets they are buying for around $10 billion, based on figures at June 30, skyrocket in value by $2.7 billion (less minorities) in the following six months. Indemnifying AMP would be an easy decision.

It’s just another factor in a takeover where few of the participants (excluding AMP) will be proud of what they have done. What should happen is that the sleepy ASIC should be required to wake up and demand AXA Asia Pacific shareholders be properly informed about the change in their long-term outlook before they make a decision. The last time a group of shareholders was so poorly informed was when MIM sold to Xstrata in 2003. Xstrata doubled and trebled their money in a short time. But in 2011 I am not optimistic the regulators have learned the 2003 lesson.

Peter Fray

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Peter Fray
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