Insurance consolidation gets heated up

Given the strength and reputation of the companies involved, there is a good chance the deal “should come out as planned”

PACIFICMAS Bhd attracted much interested over the week on news of a possible backdoor listing with the country's largest life insurance company Great Eastern Life Assurance (M) Bhd.  

This has turned the company into an easily dismissed stock to a must watch, particularly among analysts. 

Still, most contend it is too early for investors to jump into the bandwagon as the proposed mergers are still at their infancy and that it would be at least a few months before any concrete proposals are laid out. 

Last Friday, Pacificmas announced that it has received the nod from Bank Negara for wholly owned Pacific Insurance Bhd to begin merger talks with Koperasi Angkatan Tentera Malaysia Bhd (KAT)'s wholly-owned Malaysia & Nippon Insurans Bhd. 

Pacificmas was also given the green light to start talks with GEL Capital (Malaysia) Bhd for a possible injection of Great Eastern Life Assurance (M) Bhd and Overseas Assurance Corp (M) Bhd (OAC) from Singapore's Great Eastern Holdings Ltd (GEH) into Pacificmas. The asset injection would result in GEH holding a majority stake of 51per cent in Pacificmas. 

Based on Pacificmas' latest annual report to financial year ended Dec 31, 2001, Singapore's Oversea-Chinese Banking Corp Ltd (OCBC) is the company's largest shareholder with a 28.15 per cent stake via direct and indirect shareholdings.  

Other substantial shareholders of the company are United Malacca Bhd (20.85 per cent) and KAT (16.44 per cent).  

A further check revealed that OCBC also effectively holds a 15.83 per cent stake in United Malacca. It is worth noting that GEH is 48.92 per cent-owned by OCBC Singapore. 


Jolt to market 

The Pacificmas' announcement immediately caused a jolt in the market that caused its share price to soar a good 73 sen or 27 per cent to RM3.46 on the first day.  

Even when subsequent profit taking set in, Pacificmas shares managed to hold on to its gains, closing above the RM3.40 price level. 

But not everyone thinks it is a good idea to jump in at this stage. “The deal sounds good. But it takes time to get through with the merger talks, and there is no guarantee that the negotiations will materialise at the end of the day. There's some risks to be taken in chasing up Pacificmas shares now,” he says.  

Nonetheless, the dealer feels that given the strength and reputation of the companies involved, there is a good chance the deal “should come out as planned.'' 

Great Eastern Life Assurance, established with more than 93 years of experience in solid financial foundation and innovative infrastructure, is the country's oldest and largest life insurance company.  

As at Dec 31, 2001, the company's assets stood in excess of RM16 billion with more than 2.3 million policies in force. The company also has a strong service network of over 17,000 agents. 

Pacificmas' crown asset, Pacific Insurance, has a history dating back to the 1950s when the Netherlands Insurance Company – then the 12th largest in the world – started its operations in Malaysia through local representatives.  

In 1984, the company was restructured into a local insurance company registered under the name of The Netherlands Insurance (Malaysia) Sdn Bhd in conformity with the New Economic Policy.  

It assumed the name The Pacific Netherlands Insurance Bhd in early 1994 following the acquisition of 70 per cent of the company by Pacific Bank. When Pacific Bank subsequently acquired the remaining 30 per cent in June 1995, the company was renamed Pacific Insurance. 

From an easily ignored company prior to this, the announcement has compelled some analysts to keep watch on the counter. 


RM3.80 fair price 

Affin-UOB Securities, in a report by analyst Desmond Ch'ng, estimates that Pacificmas could fetch a fair price of at least RM3.80 should the merger with Great Eastern Life materialise.  

“MAA Holdings Bhd (another KLSE listed insurance holding company) presently trades at a prospective 2003 price earnings ratio (PER) of 12.6 times. If we assume that Pacificmas trades at similar valuations, Pacificmas would be valued at RM3.80/share. It is, however, conceivable that Pacificmas should trade at a premium to MAA, given the size of and backing from the Great Eastern group. A 10 per cent premium would place valuations at about RM4.20,'' says Affin-UOB Securities. 

Ch'ng points out that the RM3.80 fair value is derived based on several assumptions made on available information. 

“As the companies (Pacificmas and Great Eastern Life) involved are not within our coverage and since there are no further details on the deal, we qualify that our preliminary assessment is purely hypothetical at this juncture, with various assumptions thrown in,'' he explains. 

Ch'ng says to derive the value of Great Eastern Life and OAC, the research house applied a PER of 19.5 times to their historical (financial year) FY 2001 net profits. 

“The PER of 19.5imes was the historical 2001 PER at which GEH is presently trading at on the Singapore Stock Exchange. As for Malaysia & Nippon Insurans, we have simplistically applied a PER of 10 times to its FY2001 earnings. The result of this is that Great Eastern Life, OAC and Malaysia & Nippon Insurans are cumulatively valued at about RM2.57 billion,'' he adds. 


Worth RM826 million 

On the other hand, Pacificmas is estimated to be worth RM826 million based on its net tangible asset (NTA) per share of RM4.83 and total outstanding shares of 171 million as at Sept 30 last year. The company currently also has a net cash of RM474 million. 

With assets of Great Eastern Life, OAC and Malaysia & Nippon Insurans totalling RM2.57 billion, Pacificmas can utilise its cash balances to offset part of the acquisition cost, leaving a balance sum of RM2.1billion to be settled via issue of new shares. 

“At a NTA of RM4.83/share and RM2.1billion to be settled via shares, Pacificmas will have to issue 434.5million new shares, resulting in an enlarged share capital base of 605.5million,'' the Affin-UOB report says. 

In such a scenario, GEH would end up with a 69.5 per cent stake in Pacificmas, higher than the 51 per cent stake reported by Pacificmas. It is also not clear if a mandatory general offer will follow.  

The research house says GEH would probably have to reduce its stakes to 51 per cent over a three-year period as in the case of Germany's Allianz Aktiengesellschaft acquisition of Malaysia British Assurance Bhd (now known as Allianz General Insurance Malaysia Bhd) in 2001. 

Affin-UOB Securities says it is also plausible that the deal could be structured in such a way that GEH would end up immediately with a 51 per cent stake in Pacificmas instead of 69.5 per cent.  

But for it to happen, Pacificmas will most probably have to assume some borrowings to fund the acquisition, for it would have to fork out cash of about RM1.6 billion instead of RM474 million. 

“This would result in a net debt position of RM1.1 billion or a net gearing of about 0.6 times. Even so, we believe such a deal could potentially be earnings (EPS) enhancing, with an estimated proforma EPS of 34.6sen.  

“The problem here, however, is that with potential goodwill of RM2 billion from the acquisitions, such a scenario could possibly result in negative NTA for Pacificmas. Valuations and shareholding structures are the key determinants in this case, all of which are pending further announcements,'' Affin-UOB Securities says. 



Pacificmas' proposed insurance merger with Malaysia & Nippon Insurans is likely to see some competition from another contender Tahan Insurance Bhd. Tahan, a unit of Idris Hydraulic (M) Bhd, was initially allowed to acquire Malaysia & Nippon Insurans. 

But last October, Bank Negara withdrew its approval for the acquisition. 

Tahan Insurance had initially banked on a three-way merger including The People's Insurance Co (M) Bhd, Tenaga Insurance Bhd and Malaysia & Nippon Insurans to become an anchor insurer. Under Bank Negara's industry consolidation programme, an insurer which has successfully undergone a three-plus-one merger exercise would be granted to operate Islamic insurance business known as Takaful. 

While it was not known why Bank Negara decided to revoke its earlier decision, Tahan Insurance said it had since appealed to the central bank to allow the merger with Malaysia & Nippon Insurans.  

And Tahan Insurance deputy chief executive officer Razidan Ghazalli was reportedly said in January that the company's appeal for the acquisition of Malaysia & Nippon Insurans was still pending. 

Some analysts argued that the issue of Tahan Insurance coming into competition for Malaysia & Nippon Insurans is not likely to complicate matters for Pacificmas as Bank Negara has the final say on who will get what.  

“With the latest approval given by Bank Negara on Pacificmas (for Malaysia & Nippon Insurans), it is obvious that Tahan Insurance's quest has been stopped,'' an analyst of a local stock broking firm said. 

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