Tuesday October 5, 2010
Kuwait likely to commit US$1bil to insurer’s initial offer
HONG KONG: American International Group Inc (AIG) has received a US$1bil commitment from Kuwait Investment Authority (KIA) for the initial public offer (IPO) of its Asian unit, the first major investment inked before the mega offering’s roughly US$15bil launch.
KIA, the country’s sovereign wealth fund, is among the major global institutions that have signed up as cornerstone investors ahead of AIA Group Ltd’s IPO, according to a source yesterday.
The source had direct knowledge of the matter but was not authorised to speak publicly as the deal has yet to launch.
AIA’s IPO is set to start today, with shares expected to start trading on Oct 29.
AIA IPO is likely to be world’s second-largest this year after Agricultural Bank of China Ltd, which raised US$21.9bil in Hong Kong and Shanghai in July.
The planned listing comes after a takeover attempt by British insurer Prudential Plc collapsed in May over price disagreements.
The key question for AIG is whether the public markets will give it the US$35.5bil valuation originally offered by Prudential. Prudential later dropped the offer to US$30.4bil just before the bid failed.
“Considering that some of the Chinese insurers are trading more than two times embedded value, I think AIA can get overall value north of US$30bil,” said Sally Yim, vice-president at Moody’s Investors Service in Hong Kong and senior analyst who covers Asia-Pacific’s insurance industry.
Prudential’s initial US$35.5bil bid for AIA was pitched at 1.67 price to embedded value (EV). Embedded value is a measure commonly used to gauge the value of insurance companies that includes the present value of future profits from long-term insurance contracts.
The Financial Times was the first to report KIA’s commitment. The paper also said that the only way KIA agreed to the investment was because AIG “was forced” to lower its valuation to US$30bil-US$32bil from $35bil-US$37bil.
Research reports have put the valuation range of the offering from US$29.5bil to US$38.6bil, which gives an embedded value range of 1.1 times EV to 1.7 times. Ultimately, the valuation is determined by the company and its underwriters, who gauge the specific embedded value figure that mutual fund investors are comfortable with.
A valuation that is too high raises the most money but risks an opening day flop. Too low, and the banks are blamed for not raising enough.
“AIA is operating in some of the more mature markets like Singapore and Hong Kong. They have a little bit of a ‘China story’, but not as much as the Chinese pure plays,” Yim said.
Cornerstone investors, including Middle East wealth funds KIA and Qatar Investment Authority, played a key role in the success of AgBank’s IPO, accounting for more than half of the Hong Kong offer.
But such investors were only likely to buy 15%-20% stake in AIA offer, bankers have previously told Reuters.
AIA has yet to decide the exact stake it will sell in AIA, but bankers have said the US insurer is expected to offer around half of the company to the public market.
AIG, nearly 80% owned by the US government, is disposing of assets to repay taxpayers who committed US$182.3bil to prop up the insurer during the financial crisis.
Global equity markets rallied in September, historically the weakest month for stocks, driven by a robust Chinese economy and expectations of further monetary easing by developed economies’ central banks to support a shaky recovery.
“The recent upside momentum in the stock market will be favourable for AIA’s IPO,” Moody’s Yim added.
Cornerstone investors agree to buy into an IPO before it prices. They are barred from selling their shares for six-month lock-up period, helping build confidence in the offer before it goes to institutional investors.
AIG will hold at least a 30% stake in its AIA for a year after AIA listing in October, the IPO term sheet showed earlier. — Reuters