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MetLife is moving
up in Japan, the world’s second-largest life insurance market, with the $15.5 billion purchase of Alico from AIG. The unit accounted for 70 percent of Alico’s pre-tax operating income in fiscal year. It also has operations in Europe and emerging markets in Central and Eastern Europe, the Middle East and Latin America. Much like the $35.5 billion sale of AIG’s Hong Kong-based AIA subsidiary the week before to Prudential of the U.K, a chunk of AIG is a transformative expansion for Metlife.
Both AIG and Metlife share rose on the news – one of those win-win deals, the market says. But if you want to be skeptical, just keep in mind that AIG is still only part of the way towards repaying the $182.3 billion it owes the U.S. government and Metlife has just exposed itself to an aging Japanese population with prospects in some ways even more worrying than in the U.S., given its lost decade and its near-routine bouts of deflation.
One thing Metlife will not have to worry about is having a government functionary on its board. Though the sale features a sizable equity component from AIG, we’re told that the chance of Uncle Sam calling the shots at yet another major U.S. corporation is nil.
Emerging Europe’s No.2 lender Raiffeisen International and its unlisted parent, cooperative bank RZB, on Feb. 22 preempted a Reuters scoop and disclosed that they were considering to put their businesses together. This would add to Raiffeisen’s business, currently exclusively in the former Communist part of Europe, a franchise serving large Austrian and international companies and institutional investors. Analysts and investors have been concerned because they can’t easily put a value on RZB’s business ex-Raiffeisen, and many fear they may be put at a disadvantage in the merger. The 21 percent drop in Raiffeisen’s shares makes it possible to quantify this concern.
The planned deal – which Raiffeisen and RZB say is still only one of several options – would be implemented under a procedure known as statutory merger in German and Austrian share law. Here’s how it works: Auditors – one for each company and a third, appointed by a court – review the two companies business plans for the next 10 years and from that derive a valuation for each of the two companies. Based on that valuation, they calculate an exchange ratio for the swap of both companies’ current shareholdings into the shareholdings in the new, merged company.
Since RZB already owns 70 percent of Raiffeisen, the new company’s equity value will equal that of RZB (as determined by the auditors) plus that of Raiffeisen’s current free float of 30 percent. Or, to put it the other way round: The free float in the new company will be calculated as:
Value of Raiffeisen free float divided by the sum of RZB’s value and the value of Raiffeisen’s free float
Pending final valuations, RZB and Raiffeisen in a confidential memo obtained by Reuters have put a tentative price tag of 6.1 billion euros on RZB, which they said would equal 1.17 times its book value. The memo put Raiffeisen’s own equity value at 6.2 billion euros, based on a share price of 40 euros – the level it traded at before the possible deal was disclosed. This yields a new free float of:
30% of €6.2 bln divided by €6.1 bln plus 30% of €6.2 bln = €1.86 bln / €7.96 bln = 23%
Which is exactly what the confidential memo arrived at as a tentative free float for the combined group.
No, if you still believe in the efficient market hypothesis (and you may be forgiven if you don’t given the mispricings that helped bring about the financial crisis), you could use this formula and apply it to Raiffeisen’s share price reaction since Feb. 22.
If the market anticipates that it will be diluted to 23 percent of Raiffeisen plus RZB’s business from 30 percent of Raiffeisen alone in the deal, then let’s look how the value of that stake developed since:
30 percent of Raiffeisen at pre-disclosure 40 euros: 1.86 billion euros
30 percent of Raiffeisen now: 1.46 billion euros
23 percent of Raiffeisen at pre-disclosure 40 euros: 1.43 billion euros
In other words: 30 percent of Raiffeisen are now worth almost exactly what 23 percent would have been worth at the share price before the deal was announced. The free float’s value dropped precisely to the value it would have had if minorities were diluted to 23 percent from 30 percent without adding anything of value. In the deal, however, what would be added is RZB’s Austrian and institutional business. Ergo, what the market prices in is that its value is zero.
Of course there are a number of other factors that influence the share price. Rather than on a precise valuation of RZB’s standalone business, the share may have gone down simply because investors apply a discount for the uncertainty linked to the proposed deal, for which many variables are still completely unknown.
But be that as it may, the price now does imply a valuation of zero of RZB’s standalone business, and this opens opportunities for investors who think that it is worth more than zero, because it suggests that the market has overshot because of those deal concerns.
Slightly strange data from Deutsche Börse. Its latest survey of what top European executives have been doing shows increasing signs of optimism. That is, management board and supervisory board members and their families have been buying shares in their own companies.
All well and good. But the strangeness kicks in when it becomes apparent that a lot of this buying has been done by the top people in the south. Of 10 companies listed for the largest insider buying, seven were from southern Europe. Of the top sells, seven were from more northern climes.
Deutsche Börse notes this — “After Spain posted high purchase volumes last month (January), Italy has now awakened from hibernation” — but gives no particular guidance.
There are plenty of reasons when top executives by and sell their firms, some due to M&A or simply personal need. But overall the Deutsche Börse report does point to a more confident managerium. The February insider buy-sell ratio was 1.29, the highest since January 2009 just before the global stock market rally took off.