Amp's Bid For Gio Sets The Pace For Industry Shakeout
Sydney Morning Herald
Saturday September 19, 1998
BEFORE the $3 billion bid by AMP for GIO is over we will know a lot more about the future shape of the insurance industry and probably a lot more about AMP itself.
The offer has already helped trigger a $330 million bid by Wesfarmers for the West Australian insurer SGIO. That in turn caused GIO to lift its SGIO shareholding to more than 6 per cent to protect its own interest in the WA insurer.
The eruption of activity will in turn cause everyone else in the industry to consider their own positions and strategies to ensure they aren't left behind in the rationalisation trend.
Having started this latest eruption, AMP itself has a lot riding on the outcome: the bid is AMP's first hostile takeover; it is its first strategic move since listing; it represents a statement of aggressive intent within its home market; and it is illustrative of the extent of its internal cultural change. At that level the GIO bid is one AMP cannot afford to lose. However, it cannot be seen to pay too much.
AMP has at least $5 billion (maybe as much as $8 billion) to spend and an appetite for acquired growth. It can't afford to be seen as a soft touch. It needs to win the GIO bid on its own terms, or lose credibility.
AMP is acutely aware of the wider significance of the bid and its outcome. Its uncharacteristic aggression towards the bid - overtly and behind the scenes - indicates the importance it places on the transaction.
GIO, however, isn't going to surrender meekly. While talk about queues of counter-bidders has subsided, and the prospects of a rival emerging have been discounted by the market (by trading GIO shares just above the bid price), its instant intervention in the SGIO bid process says GIO values its independence.
The SGIO process is getting messy. Wesfarmers holds 15 per cent of SGIO and has announced a $330 million, $1.60-a-share offer. GIO has been in the market for SGIO shares at prices above that bid. Given the presence of these two strong players, SGIO won't be sold cheaply.
If GIO were to bid for SGIO - and there isn't much point in acquiring more shares unless it were contemplating a bid - it could breach AMP bid conditions and that would enable AMP to walk away. It is unlikely, however, that it would take advantage of this opportunity.
If GIO did bid for SGIO and was successful, presumably it would do so on the basis that the deal added value. It would be disciplined by the knowledge that if it paid too much for whatever synergies and strategic gains there might be from such an acquisition, it would dilute its own shareholders' interests and make it easier for AMP to convince them to take its paper.
If the deal adds value to GIO, then presumably it would make GIO even more attractive albeit, given the relatively modest scale of SGIO, at the margin, to AMP.
It won't have been lost on the GIO camp that the Wesfarmers bid for SGIO, and its own buying, can be used tactically within the context of its own defence against AMP.
There are those in the market who have already seized on the Wesfarmers bid price to argue that it demonstrates AMP's bid under-prices GIO. If the SGIO price rises further as a result of a contest between Wesfarmers and GIO, its final level will no doubt be seen as a benchmark for the AMP offer.
` Reinsurance is at a low point.' While that is reasonable - markets operate on the basis of relative value - the comparisons aren't straightforward and would be compromised if it were GIO itself driving up its own benchmark by igniting an auction.
While far smaller, SGIO is a fundamentally more attractive business than GIO. It has a dominant position in WA, whereas GIO has significant competitors in its home market. It also doesn't have the large reinsurance portfolio of GIO.
Losses within that portfolio drove GIO to a $28 million loss in the year to June. Since then it has admitted it will experience further losses as a consequence of the recent Swissair disaster. Those losses are said to amount to more than $40 million.
The reinsurance business is at a low point. A recent meeting of the market's major players, at the so-called "Monte Carlo Rendezvous" (the first of three meetings within the markets that sets reinsurance premiums for the year ahead) has confirmed that the market will remain soft for the next year at least.
Any comparison between GIO and SGIO has to take into account the importance of the reinsurance business to GIO's performance in recent years and the very ordinary outlook for that business. While there has been a lot of talk about the inadequacy of the AMP offer - GIO CEO Nick Steffey has talked about his company being worth nearly twice as much as the $4.99 a share at which the AMP scrip offer of $4.88 per share, ex-dividend, values the group - the offer doesn't appear grossly mispriced.
Wesfarmers has bid 16.3 times the consensus forecast of SGIO's earnings for 1998-98 and about 2.3 times SGIO's net asset value. AMP has bid more than 17 times the consensus forecast of GIO's earnings and about 2.1 times net assets.
Given that GIO's reinsurance business is significantly less attractive than retail insurance and funds management operations, it is arguable that the pricing framework of the AMP bid for GIO represents a significant premium to the Wesfarmers bid for SGIO. No-one would pay 2.3 times book value for a reinsurance portfolio.
AMP could increase its offer, although it has effectively increased it once already by putting a floor of $4.88 under the value of its scrip bid.
The tension between its need to succeed in this hostile bid and the need to be seen to be hard-nosed and frugal will complicate its approach and ensure that the contest, while fierce, will be narrowly won or lost.
© 1998 Sydney Morning Herald