Friday October 19, 2012

Khazanah may join other bidders for stake in CIMB Aviva


PETALING JAYA: With the chapter closed on the sale of ING's Malaysian insurance operations to AIA Group Ltd, attention on the insurance realm has now turned towards CIMB Aviva Assurance Bhd being divested.

Although no firm details have been revealed on the deal, market guesswork has pointed to three of the four suitors reported, including Prudential plc, Manulife Financial Corp, AIA and Sun Life Financial Inc, which have made it through to the second stage of bidding for Aviva's stake in the business.

An industry source told StarBiz that CIMB Aviva made a presentation to bidders last week for them to assess the company and clear queries before putting in their offer price.

However, he also noted that the there could be a bidder that had not been mentioned before Khazanah Nasional Bhd.

“Rumours are that Sun Life is to buy Aviva's stake while Khazanah will buy CIMB's stake,” he said. It was not clear whether the bidders would take on the entire or a portion of Aviva and CIMB's stakes.

Another source believed that Prudential was out of the picture but thought Manulife could emerge as the buyer. AIA was no longer in the running after buying over ING Malaysia.

“If you look at Manulife's share price over the past few months, its movement suggests there is something brewing there,” he said of Manulife Holdings Bhd, the locally listed unit.

The counter has been on the upward trend from RM3.38 when news about CIMB Aviva's divestment first broke in May, to its current RM3.76 price. In fact, after a dip in August, Manulife has steadily gone up 44 sen between early September and now.

When contacted, CIMB, Prudential and Manulife declined to comment on the matter. Reuters reported last month that CIMB had set Oct 29 as the deadline for the suitors to place binding bids.

According to analysts covering the insurance sector, the divestment could come in second to the AIA-ING merge in terms of valuation.

An analyst with Kenanga Research said based on market speculation that the CIMB Aviva deal was US$500mil (RM1.52bil), the sale would work up to 2.7 times price-to-book value as the total shareholders fund stood at RM581mil.

Just a week ago, AIA paid 2.2 times price-to-book value for ING Malaysia at a price tag of US$1.73bil (RM5.31bil).

The CIMB Aviva shareholders' funds are made up of RM145mil under its takaful business and RM436mil from its life insurance operations.

He also said that the new stakeholder was rumoured to have signed an exclusive strategic alliance with CIMB to sell life insurance through the latter's banking network, a model that takes after Public Bank's exclusive distribution of ING's bancassurance products for 10 years.

“Using the ING-Public Bank strategic alliance as a reference, that move could probably fetch another RM200mil in goodwill payment to CIMB on top of the already good valuation we expect of the stake sale,” he said.

In its report, Kenanga noted that such strategic alliance would allow the winning bidder to distribute bancassurance products through CIMB's subsidiaries, including CIMB Bank, CIMB Niaga, CIMB Thai as well as Bank of Commerce Philippines, and create a new distribution channel not captured by the traditional insurance sales force.

The analyst believed that the company buying into CIMB Group's stake wanted a controlling stake. Hence, CIMB's stake post-sale would likely range between 25% and 30%, from its original 51%.

Another analyst with a bank-backed brokerage said there was still the possibility that CIMB would sell its entire stake in the joint venture if the buyer was an insurance outfit.

“The company would not be able to operate with two insurance licences, so CIMB may back out,” he said, adding that “since the joint venture was not making much money for them, CIMB could choose to raise capital instead if the price is right.”

Kenanga Research said in a report that it believed this corporate action could unlock CIMB's value further.

It said the stake sale from CIMB Aviva and potential one-off goodwill payment could replenish CIMB's capital after its two major acquisitions made early this year 60% of BoC Philippines and certain geographical operations under the Royal Bank of Scotland.

“Note that these recent acquisitions are earnings accretive over the medium to long term and would give CIMB a full Asean banking coverage,” it said.

The research house is of the view that on the overall, the banking group is well positioned for the next Asian recovery cycle.

The reason behind the divestment was due to the insurance business underperforming. Last year, CIMB Aviva reported a 30% decline in net premiums while its net profit was only RM31.8mil, about 0.6% of CIMB's 2011 group earnings.

UK-based insurer Aviva plc had in May announced it was planning to sell its 49% stake in the joint-venture company, in line with plans to exit non-core operations that were part of its global retreat.

Over the months, it has surfaced that CIMB has also not exercised its right of first refusal, meaning it has no intention to purchase Aviva's stake before the offering is made available to others.

It was initially believed that CIMB Group would come to a decision at end-September but the banking giant had kept mum.

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