It’s not in the league of Chinalco’s $19.5bn bid for a stake in Rio Tinto, but Asia’s largest unsolicited takeover offer of the year could be about to get larger, if analysts and investors are proved correct.
As Bloomberg reports on Tuesday, Citi analysts led by Nigel Pittaway said in a Monday note that Axa and Australian wealth manager AMP could well sweeten their joint bid for Axa Asia Pacific Holdings (APH) to about A$12.4bn ($11.6bn), after APH rejected a first offer of A$11bn on Monday as inadequate. Analysts at Credit Suisse and RBS also predict a higher offer.
The market agrees. APH’s stock price soared 33 per cent on Monday and a further 2.5 per cent on Tuesday as investors piled in to bet on a higher bid.
The FT adds that this is the second time in five years that Axa, which holds 53.9 per cent of APH, has tried to buy it outright. This time, it is firmly on the acquisition path, launching on Monday a €2bn ($3bn) rights issue as part of what it called an “aggressive” strategy to fund acquisitions. As the FT notes in a separate report:
The French group’s attempt to take over the purely Asian part of Axa Pacific Holdings in an $11bn break-up deal with Australia’s AMP highlights its ambition to mimic the Asian growth story of rivals such as Prudential, the UK group.
Gains in AMP’s stock on Monday swelled the value of the offer to A$5.64 per share from an initial A$5.34. But as Citi’s Pittaway says, if the bidders raise their offer to A$6, “one wonders for how long Axa Asia Pacific would then be able to hold out.”
The context of the bid is “tortuous”, in Lex’s view, though it manages to sum it up neatly on Tuesday:Five years ago Axa chief executive Henri de Castries failed in a bid to buy out minorities in the unit, [then called National Mutual] renamed Axa Asia Pacific Holdings (APH) in 1999, three years after listing in Australia. Now he’s back, and mob-handed. Under a A$11.5bn cash-and-share proposal, Sydney-based wealth manager AMP will buy APH, including Axa’s now 54 per cent stake. AMP will then sell back the Asian operations to Axa for about 70 per cent of what it paid for the whole lot, keeping the Australian business for itself.
On the price issue, the offer seems “opportunistically timed”, Lex adds, explaining:APH, where over half of operating earnings are in Hong Kong dollars, has lagged Aussie-dollar earners on the ASX for months. But the price is not yet a knockout. An implied 1.2 times embedded value for the Australian business is in line with recent acquisitions. But on Daiwa SMBC estimates, Axa would be paying about 1.6 times 2008 embedded value for the faster-growing Asian business. Something closer to two times, equivalent to about A$6.15 a share, might clinch it. Determination to shake off an unwanted chaperone should ensure that [Axa CEO] Mr de Castries digs a little deeper.
Opportunism? There are a host of intriguing theories about Axa and AMP’s motives. But on the question of how the bid proceeds from here, the most cynical take so far comes from BusinessSpectator’s Robert Gottliebsen, who writes:
Step one: First you put in a low bid with all sorts of qualifications and nasties. Step two: It is of course rejected by the target board but then all the hedge funds and punters plough in and buy the stock discovering the level at which institutional shareholders will sell. Step three: The hedge funds use their mates in the print press to attack the defending board. All sorts of scoops are arranged. Step four: Then the bid is lifted to a level that gives the hedge funds a profit and all the nasty qualifications are removed. The press warns shareholders that the price will drop if the bidders withdraw because all the hedge funds and other speculators will sell their stock. Step five: The board gives in.
Gottliebsen’s Business Spectator colleague, Stephen Bartholomeusz, meanwhile writes:
AMP would be acutely aware that the French group would be indifferent to the identity of its local partner. AXA SA sees an offer from a local player as the key to gaining AXA APH shareholder and regulatory approval for swapping an indirect interest in the Asian operations for full ownership and control of them.
AMP just happens to be the most obvious and willing partner and the merger of the two biggest non-bank financial institutions provides the best story for investors. The sharp increases in both the AXA APH and AMP share prices have validated that view.
So what next? Axa and AMP must win approval from APH’s independent directors and minority shareholders to carry out the purchase. As Bloomberg reported, John Heagerty, a Sydney-based analyst at RBS, said it may be “difficult” for those directors to reject a second offer of A$6 a share or more.
Meanwhile, the offer has not impressed S&P, which has cut its rating on Axa’s Australian and NZ subsidiaries by two notches to A+, the fifth-highest investment grade, from AA, noting: “Even if the offer does not eventually go through, this indicates that Axa considers these subsidiaries non-strategic”.
Related links:
The Axa maze, David Llewellyn-Smith – BusinessSpectator
Axa gets bullish and busy on acquisitions – FT
Axa, AMP $10bn bid may signal resurgence in insurer M&A – Bloomberg