AXA Now Firmly In Play

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 By Greg Peel

The story so far:

Around the first week of November, AXA Asia Pacific ((AXA)) shares were trading at just over $4.00 and looking pretty friendless. Despite a 50% rally in equity markets, funds under management flows were nothing to write home about, and AXA’s Asian assets were causing problems. This had brokers looking to AXA AP as potentially an undervalued stock.

They were right. On November 9 a joint bid for AXA AP was announced by local AMP ((AMP)) and French-based AXA SA. AMP would take AXA AP’s Australasian assets via a scrip-swap component and AXA SA would take its Asian assets via a cash component. Based on the AMP share price at the time, the bid was worth a net $5.34.

Broker’s immediately called the bid undervalued, and suggested AMP could pay up to an equivalent $6.00 and still enjoy an earnings accretive deal. AXA AP management dismissed the bid of the bat. The market bought AXA shares in anticipation of another bid, while AMP shares were also bought given the deal also put AMP in the spotlight as a potential target, failing a successful AXA AP takeover. With every cent the AMP share price ticked up, the scrip component improved the value of the joint bid. And analysts saw an integration as a good move for AMP anyway.

As expected, the joint bid was increased on December 14 via an increased cash component from AXA SA. The AMP component had already improved by virtue of its share price, so all up it was a 16% improvement to about a $6.20 equivalent. Broker’s suggested AXA AP would be mad not to accept, but the market was still worried management might foolishly reject the bid. It had to December 21 to decide, and AMP had declared the new bid “best and final”.

Brokers did not expect a counter bid would be forthcoming from a different party. Australia’s Big Four banks were largely dismissed as potential bidders.

AXA AP management did not, however, have time to do the wrong thing before the brokers were proven hasty in their assumption. Yesterday, out of the blue, National Australia Bank ((NAB)) did indeed make a counter bid, at least for the same assets AMP wanted. AXA SA is happy to join with this new partner instead of AMP. AXA AP management immediately rejected the second AMP bid and recommended the NAB joint bid to its shareholders.

The new joint bid values AXA AP at $6.43, and a big difference is that unlike AMP, NAB is prepared to offer either a scrip swap and cash or all cash for AXA AP shares. So it is a bid of a less risky quality as well – more attractive for AXA shareholders.

Already today AXA shares have been bid up to over $6.50, as the stock is now firmly “in play”. While AXA AP has recommended the bid, the first deal between AMP and AXA SA included an exclusivity clause on the arrangement, such that AXA SA will have to wait until February 6 before it can legally team up with NAB. And thus in the meantime, someone else could come out of the woodwork.

And indeed, someone could also make a swing at AMP.

It is important to note that despite AXA AP having recommended the new bid, it has still left the door open for another bid to emerge, or for a further bidding war between the AMP camp and the NAB camp. Analysts are split on whether AMP might improve its bid a second time, with those suggesting it’s a possibility clearly dismissing AMP’s earlier “best and final” declaration.

Either way, the call from the brokers is that AXA AP shareholders might as well hang in there for now, as anything might happen. No one is suggesting “sell now”.

From AMP’s point of view, this is clearly a set-back. Brokers suggest the acquisition of AXA AP’s local assets would be a very sound move for the wealth manager, and as such would not rule out AMP deciding to go again. AMP management has at least until February 6 to think about it. But the problem is NAB has “much deeper pockets”, as GSJB Were specifically points out, and thus there’d be little point in AMP engaging in a bidding war. It’s a tough one.

From NAB’s point of view, brokers note a successful takeover of AXA AP’s local assets will make NAB Australia’s wealth management, and specifically superannuation, powerhouse. There are questions about near term dilution however, and the drop in the bank’s tier one ratio, which would be more pronounced were AXA shareholders to insist on all cash.

But of more concern is NAB’s estimation of achievable synergy savings upon integration. AMP was touting only $120m in savings, which brokers saw as quite conservative. NAB, on the other hand, has assumed $260m of possible synergy savings, and brokers suggest this looks a bit rich. Clearly there are integration risks involved.

So NAB shares have been carted by 3% today, but that reflects potentially shifting an amount of nice, safe cash towards a risk asset and some dilution to boot. Nevertheless, both NAB and rival ANZ Bank ((ANZ)) – which, incidentally, brokers thought might be the obvious Big Four bidder for AXA if there was one given its Asian aspirations – have recently raised pre-emptive capital for exactly these kind of acquisition opportunities. NAB shareholders are no doubt worried that the bank will indeed enter into a costly bidding war.

It’s going to be a long, hot summer.

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