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The Ping An-Fortis Deal: Who Really Wins?

04-03 15:34 Caijing Magazine

China's Ping An Insurance chose a turbulent time to buy a big stake in Fortis for its first overseas investment, and boost that stake just months later.

By staff reporter Chen Huiying

Analyst reports and market rumors about the overseas investment plans of Ping An Insurance (Group) Co. Ltd. (SSE: 601318, HKSE: 2318) have been mounting ever since the Chinese insurer found a partner in Fortis Group.

Ping An’s strategy is slowly coming into focus, as are Fortis’ moves toward the growing Chinese market. But it’s unclear who might benefit, and how.

Ping An made its first large-scale, overseas investment in November by buying a stake in Fortis, and then took the cooperation a step further in March.

Ping An and Fortis jointly announced March 19 the signing of a memorandum of understanding to establish a global asset management partnership. Ping An plans to put up 2.15 billion euros to acquire a 50 percent stake in Fortis Investments, an asset management subsidiary.

Under the terms of the agreement, Fortis Investment would be renamed Fortis Ping An Investment Management Group Holdings. The new company would hold all assets related to Fortis’ global asset management business and those held in Ping An’s Hong Kong asset management business -- totaling more than 200 billion euros. The new company would be registered in Belgium, positioning itself as a global asset management company.

The investment would top Ping An’s 1.81 billion euro payout for a 4.18 percent stake in Fortis on the secondary market a few months earlier.

Ma Mingzhe, Ping An chairman and CEO, said the latest investment plan fits the company’s long-term development strategy, and will increase returns while creating a stable cash flow. He called it an important step toward the company’s “three pillars” strategic framework, which includes insurance, banking and capital management.

“Ping An is gradually establishing a global asset management framework. The next big challenge is integration and implementation,” an insurance industry analyst told Caijing. “Currently, the thought process behind Fortis Ping An’s future operations is ‘made by Fortis, sold by Ping An,’ which is aimed at serving China’s massive demand for overseas investment.

“However, how much Ping An will actually gain from the acquisition on financial, technical and strategic levels remains to be seen,” the analyst said.

Previous Cooperation

Ping An also decided to devote itself to banking, insurance and asset management, eventually choosing to invest in Fortis, with its similar business lines.

Ping An and Fortis announced in late November that Ping An had bought a stake in Fortis on the secondary market, becoming its single largest shareholder. The deal also allowed Zhang Zixin, executive director and general manager of Ping An Group, to join the Fortis board as a non-executive director.

In the months that followed, Ping An repeatedly emphasized that its motivation for the investment was simply financial gain, and pointed to Fortis’ generous dividend policy for support. Fortis pays dividends every half year that are equal to about 45 percent of company profits. Since its founding, Fortis has never reported a decline in net annual income. Even after the dot-com bubble burst, Fortis was able to stick to its dividend policy; from 1990 to 2006, its earnings per share and dividends grew at compound annual rates of 11 percent and 15 percent, respectively.

But, clearly, Ping An had more than financial reasons for its first Fortis investment. Informed sources said that, after the deal was announced, intense meetings to hammer out a cooperative agreement between the companies were held in Shanghai and Brussels. Attending were officials from Ping An, Fortis and its financial advisers JPMorgan Chase and Merrill Lynch. The in-depth talks encompassed insurance, banking, private banking, asset management and other subjects.

Buying ABN Amro

Fortis had already experienced another remarkable merger process earlier in 2007 by participating in the RBS consortium bid for the Dutch bank ABN Amro. The consortium won with a payment plan that included a high level of cash. Thus, Fortis planned to pocket ABN Amro’s private banking asset management business as well as its sales network in the Benelux area.

To pay ABN Amro’s 24 billion euro price tag, Fortis mobilized a variety of financial resources, issuing stock options and convertible secondary hybrid securities, selling non-core assets, and issuing asset securitization products.

However, as the global fixed-income market weakened in the second half of last year, asset securitization financing hit a wall. Moreover, in response to shareholder demands, Fortis reported write-downs of 2.7 billion euros for subprime-related assets in the fourth quarter 2007.

Under dual pressure from the subprime crisis and the acquisition of ABN Amro, Fortis’ financial situation raised concern among ratings agencies. On March 5, for example, Moody’s adjusted its Fortis rating, maintaining its Aa3 rating, but changing its outlook from “stable” to “negative.”

As Fortis share prices fell, Ping An continued to increase its holdings as majority stakeholder. By January 22, the Chinese company had collected 110 million shares of Fortis, raising its total stake to about 4.99 percent, valued at about 2.11 billion euros.

The Deal

"Asset management is the weakest of Ping An’s three pillars," the analyst told Caijing. "Relying on its own growth to establish an asset management network would be a lengthy process. The acquisition is a shortcut."

The process from early intent to due diligence and transaction pricing and finally to the signing of the MOU on March 19 took only three months.

But the agreement has yet to be formalized. The deal still hinges on the pending merger, expected in early April, of Fortis Investment and ABN Amro Asset Management. Only afterward, and only if regulators agree, would Fortis and Ping An sign a formal agreement.

Ping An’s announcement said if the two sides have not signed legally binding transaction documents by April 15, the MOU will be terminated.

Fortis, meanwhile, also pledged to fully compensate Ping An for the 23 million euros in subprime-related assets that were in the Fortis portfolio as of December 31, should the assets lose value. 

The Ping An – Fortis Deal
The pending agreement would allow Ping An and Fortis to each hold 50 percent of the new asset management company, but Fortis would control exactly one more share than Ping An. The new company’s board of directors would have 12 members, including six non-executive directors and four independent directors. Ping An and Fortis would each nominate three directors and recommend two. Fortis would nominate both executive directors, one of which would serve as CEO, as well as a director who would become the chairman.

Ping An and Fortis would each nominate members to the committiees overseeing pay, promotions and audits, as well as assign representatives to attend Asia management committee meetings as non-voting observers. They would also temporarily assign investment experts to the company’s Asian offices.

Getting What They Want

A source close to Fortis said these arrangements are designed to ensure Fortis’ continued work toward integrating its investment. Ping An’s main interest, meanwhile, is to gain experience in overseas investment, which it currently lacks. And by not participating in management and the nominations of key directors, the Chinese firm’s would limits its operational risks.

A report by Goldman Sachs said Ping An would benefit by buying Fortis Investment in three areas. First, Ping An’s capital management scale and products would improve, particularly by enhancing asset management experience for third party customers. Second, Ping An would obtain skills in product design, investment management, research, IT and marketing. Third, Ping An’s joint venture may give the company a competitive advantage over domestic competitors in areas of overseas investment and overseas investment products.

But Ping An’s own contribution to the joint venture should not be overlooked, said one market insider. “How to win China’s overseas asset management business is an important question for all international financial institutions. Through this joint venture with Ping An, Fortis has opened a channel to attract Chinese capital.”

After the chain of acquisitions is completed, the asset management institutions of Ping An Asset Management Co., Haitong Fortis and ABN Amro are expected to operate independently on the Chinese market. According to the agreement, Haitong Fortis would be included in the Ping An Fortis investment framework.

What’s Next?

During a conference call March 20 to announce Ping An’s earnings, Zhang said the asset management business require little capital investment. John Pearce, Ping An’s chief investment officer, also noted that integrating Fortis and ABN Amro’s asset management business would make a significant contribution to Ping An’s profit growth.

But other market analyses indicate that the short term contribution to Ping An’s profits would not be significant. “Ping An’s investment in Fortis was made at market price, with no discount, so the short term profit contribution is quite limited,” a market source told Caijing.

According to Zhou Guang, an analyst with China International Capital Corp., data released by Fortis Asset Management indicates that 2007 net income -- including profits from ABN Amro Asset Management Co. -- was 257 million euros. Net income from a 50 percent stake would equal 129 million euros, making Ping An’s 2.15 billion euro investment offer equal to 16.7 times 2007 earnings.

Zhou also noted that a direct risk of overseas investment is adverse exchange rate movements. Considering Fortis’ limited income from investments, if the yuan appreciates significantly against the euro, Ping An’s financial gain for the acquisition would fall.

A source close to Ping An told Caijing that data from the joint venture would not be available until next year. For now, the only information available is the ratio of price-to-assets under management.

Fortis Investment originally managed 133 billion euros. After adding ABN Amro’s business, total assets under management by Fortis would reach 245 billion euros, with 50 percent coming from third party customers. By this calculation, the price-to-AUM ratio is 1.8 percent, below than the current market average of 3 percent.

In fact, it has been a trend in recent years for large financial groups to gradually spin off asset management businesses. Citigroup and Merrill Lynch, for example, each sold their asset management subsidiaries.

A senior asset management industry source told Caijing that issues still to be settled range “from the incentive mechanism to shareholders adjustments, the integration of Fortis and ABN Amro asset management, and the cooperation between Fortis and Ping An.”

1 yuan = 14 U.S. cents


Fortis in China

Fortis’ main businesses are in banking, insurance and asset management. In the new millennium, the company has devoted itself to breaking out of the Netherlands-Belgium-Luxembourg area for a journey toward international development, with China as its main destination.

In 2001, Fortis acquired a 24.9 percent stake in Pacific Life, and two years later it formed a joint venture with Haitong Securities (SSE: 600837) called Haitong Fortis Fund Management Co, taking a 49 percent stake. Through these ventures, Fortis broke into the life insurance and asset management markets in China. The company also extended an olive branch to some of China’s big banks and insurance organizations, offering equity cooperation.

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