National Australia Bank Ltd. (NAB) said Monday that it has
agreed to buy some of Aviva PLC's (AV.LN) Australian business for
A$825 million cash to expand and enhance its own wealth management
business.
The purchase is expected to add to earnings per share and return
on equity in its first full year after acquisition, excluding
estimated integration costs of A$125 million, the bank said in a
statement.
Before completion, Aviva's Australia unit will pay a A$40
million dividend and will also pay a net asset adjustment of A$60
million after the deal is completed, taking total proceeds for
Aviva to A$925 million, the largest U.K. insurer by market
capitalization, said in a statement.
National Australia Bank is seeking to boost earnings from wealth
management and insurance to offset bad debts and slower loans
growth arising from the global credit crunch.
The bank will acquire all shares in Aviva Australia Holdings
Ltd., which includes Norwich Union life insurance, Navigator
investment platform operations and strategic stakes in four
independent financial advisory firms, but not Aviva's asset
management business or interest in PIH financial advisory business,
it said.
"This acquisition will enhance our offering in key wealth
management segments including insurance and investment platforms,
adding scale, efficiency and new capabilities to our operations,"
National Australia Chief Executive Cameron Clyne said.
It is the first acquisition for Clyne, who replaced John Stewart
in January and wants to build on the bank's business lending and
wealth management units.
The transaction is at a price-to-embedded-value of A$734
million, or 1.1 times at Dec. 31, and at a price to earnings
multiple below sector comparables such as AMP Ltd., AXA Asia
Pacific Holdings Ltd. and Tower Australia Group, National Australia
said in presentation notes, without specifying a figure.
The bank said its tier 1 ratio would fall by about 15 basis
points as a result of the transaction.
"It will give us scale in the life insurance business" and would
grow its exposure by 29% to A$1.13 billion, Steve Tucker, head of
National Australia's wealth management unit, said in an interview.
The wealth management business will grow to about A$51.8 billion in
funds under advice from A$39.4 billion at Dec. 31 and including
Navigator's A$12.4 billion, he said.
The sale should ease concerns about Aviva's capital position
after it posted a net loss of GBP885 million last fiscal year and
also ease fears that it may return to the market for more funds
with its balance sheet battered by the credit crisis and market
downturn.
U.K. insurer Aviva said it sold the unit to focus on key growth
markets in Asia, including China and India, where it hopes to
achieve dominant positions.
The transaction price represented 16 times 2008 net earnings, or
5% of Aviva's capitalization, for a business that accounted for
2.6% of the company's operating profit last fiscal year, Aviva Asia
Pacific Chief Executive Simon Machell told reporters on a
conference call.
"The rationale for the sale is simple. It was clear that growth
to a leading market position from the small base we had in
Australia would be challenging due to the competitive nature of the
market," he said.
Aviva currently ranks ninth in the Australian life insurance
market and its wealth management platform is ranked eighth, Machell
said.
"It would be more valuable in the hands of a larger, local
participant, particularly in a consolidating industry where scale
matters," he said.
"Australia is a good market in which to dispose of assets,"
Machell said, because it is "less affected by the global financial
crisis" with high interest in the business, the prospect of
receiving a good price for the assets, particularly with the
Australian dollar gaining against the British pound in recent
months.
The unit had earnings of A$60.7 million in the year to Dec. 31,
down 37% from A$96.2 million a year earlier, with life insurance
accounting for 65% of its profit last year.
Aviva will keep its asset management business in Australia to
capitalize on the growth of the country's pension fund market,
Machell said.
The acquisition is expected to generate total synergies of about
A$70 million a year before tax, with about A$50 million from cost
cutting and A$20 million from additional revenue, National
Australia said.
"Given that it's quite hard to do anything in terms of
acquisitions in banking, (growing its) wealth management makes
sense but, in the scheme of things, it's a fairly small deal," said
a Melbourne-based analyst, who declined to be named. "It's not a
transformational deal. It serves both parties well."
"I'm surprised by the relative size of the integration costs of
A$125 million on a total of A$825 million," the analyst said. "It's
quite significant but it's a fairly small (transaction) and it
won't change our hold recommendation on the stock," the analyst
said.
Steven Marsh, a fund manager at Trust Co. Funds Management in
Sydney, said: "It looks like a good price and I dare say the
integration costs were part of the negotiations."
Marsh, who holds shares in the lender, expected further bolt-on
acquisitions by local banks as they focus on growing their domestic
operations rather than pursuing foreign targets.
"This strategy is more sensible because you need scale in that
sort of business and there are pressures on fees everywhere," he
said.
The Aviva businesses had about 350,000 customers at Dec. 31.
Australian newspapers had reported that National Australia had
been in a battle with others, including AMP, Tower and Macquarie
Group to buy the business for as much as A$1 billion.
Machell said that four companies made it into the final round.
He declined to identify the other bidders.
The sale is subject to regulatory approvals and is expected to
be completed during the fourth quarter of 2009, National Australia
said.
Morgan Stanley and JPMorgan Chase & Co. managed the
sale.
-By Andrew Harrison, Dow Jones Newswires; 61-3-9292-2095;
andrew.harrison@dowjones.com
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