Proactive investors

AXA Asia Pacific Holdings Limited

AXA Asia Pacific merger sensible for AMP

AXA Asia Pacific holdings (AXA AP) has this week rejected an $11 billion cash and scrip offer from an alliance between its French parent AXA SA (53.93% shareholder) and AMP.

Under the terms of the deal, AXA AP shareholders would receive 0.6896 AMP shares and $1.3796 in cash for each of their existing shares. This equates to $5.34 per AXA AP share, representing a 31% premium to the stock’s previously traded price. AXA AP’s independent directors have however dismissed the offer as insufficient.

Nevertheless, the formation of a partnership with AXA AP’s parent company is a sensible strategy for AMP, removing what otherwise may have been a significant stumbling block. Should they ultimately prove successful, either through a higher price or simply by winning shareholder support, the bidding parties will divide their spoils along geographic lines. AMP will retain the Australian and NZ businesses, while AXA SA will acquire the Asian arm.

Under the current terms of the deal, the net cost to AMP for the Australian and New Zealand business is $4 billion. This is comprised of $3.8 billion in scrip and cash of $215 million. The offer price represents a price to earnings multiple of 16.6 times. While this is not startlingly cheap, the sector’s earnings are currently at a cyclical low and realisation of synergies will further benefit earnings in the years ahead.

AMP has estimated synergy benefits of $120 million per annum. Synergies would predominantly come on the cost front, through headcount reductions and the rationalisation of back office systems and platforms. Although less significant, there would also be revenue synergies through the transfer of AXA’s funds under management to AMP capital.

The upfront integration cost is estimated at $285 million and the deal would be earnings per share accretive in its second full year.
 
The $285 million integration cost is comparatively high, primarily due to the complexity of each companies’ IT systems and platforms. Integrating and rationalising the systems would certainly be a challenging task and AMP is wise not to under-estimate this.

Merger rationale

As management pointed out in today’s conference call, the acquisition of AXA AP’s Australian and New Zealand assets would be transformational for AMP in terms of market share gain. This is a key reason behind management’s willingness to pay more for AXA AP than the Aviva business, for which NAB outbid them.

Indeed, the AMP/AXA AP merger would knock NAB (including MLC and Aviva) from the top spot in terms of market share of retail superannuation (23.6% versus 19.3%), retail managed funds (18.1% versus 15.5%) and individual risk (life insurance, 20.1% versus 19.1%). The combined business would also nudge ahead of CBA/Colonial with regards to the Australian retirement income market (17.6% versus 17.1%).

The Australian wealth management industry is particularly attractive due to compulsory superannuation, which serves to underwrite robust growth. Taking the opportunity to acquire a market leading position is therefore not difficult to justify conceptually.

This story continues in the Fat Prophets Members area. To get the complete report, join Fat Prophets today!