Revised AXA Offer Likely To Succeed

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By Chris Shaw

Since AMP ((AMP)) and French-based AXA SA made their initial offer for AXA Asia Pacific ((AXA)), many in the market have been expecting a higher offer to be forthcoming and yesterday it arrived, the revised bid being lifted by around 10% to an implied price of $6.22 per AXA share. The cash component of the deal has also been improved, increasing to $1.92 per share from around $1.38 previously.

If successful the deal will see AXA SA take AXA Asia Pacific’s Asian assets, while AMP would gain control of the Australian and New Zealand businesses. Even on the revised terms the deal appears accretive to AMP’s earnings in year two, Credit Suisse noting AMP management has identified $120 million in synergies that should result in a boost to earnings per share of around 1.8% in FY11 and 2.5% in FY12.

This leads the broker to suggest there is little downside for AMP as not only are the deal metrics favourable but so too are the medium-term market dynamics, as acquiring the Australian and New Zealand operations of AXA would give the combined group the leading market share in the Australian life insurance market at around 19%, while also increasing its scale in the wealth management sector.

According to RBS Australia, the revised offer will be just 0.5% less accretive to AMP’s earnings than the previous offer, while it continues to suggest the $120 million identified as potential synergy benefits is a modest figure. The pricing of the revised deal also appears clever in its view as it is now within the expected range of $6.20-$6.30 but has been set near the bottom end of this range.

With the new bid being classed as “best and final”, AXA Asia Pacific directors have until December 21st to consider the proposal and in the view of JP Morgan the revised offer is likely enough to see the bid be successful as it fully values the company on its numbers. Based on a last sale price of AMP of $6.23, JPM estimates the offer is pitched at an implied multiple of 22.6 times 2010 earnings per share forecasts, which compares to an average one-year forward multiple for AXA over the last seven years of 16 times.

RBS also expects it will be very difficult for the independent directors of AXA to not recommend the new offer, especially as the increase means AXA shareholders are increasingly likely to want to vote on the outcome and for that to occur the deal needs their recommendation. As well, there is potentially significant downside risk to the AXA share price if the new offer is not recommended as JP Morgan estimates the stock could fall to around $5.00 per share if the bid were rejected, which increases the pressure on the directors.

The biggest potential spanner in the works is a bid for AMP, though as Credit Suisse points out this is unlikely as the best placed to make a move are the four major banks in Australia given the level of synergies required to make such a deal stack up. Out of the big four, Credit Suisse notes two of those, National Australia Bank ((NAB)) and Westpac ((WBC)), are already integrating business units into their operations and so are unlikely to be involved. This leaves Commonwealth Bank ((CBA)) and ANZ Banking Group ((ANZ)) as the most likely, though on Credit Suisse’s numbers only CBA is a logical option as it has the business overlap and price-to-earnings rating to justify the transaction at present.

On the news of the revised offer for AXA there have been no changes in broker ratings for the stock, the FNArena database showing a total of two Buys and seven Holds. For AMP the database shows a total of four Buys, one Accumulate, three Holds and one Underweight .

Shares in AXA today are weaker and as at 11.15am the stock was down 8c at $5.64, while AMP was trading 1c higher at $6.24.

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