Is AMP getting good value for Axa and could ANZ really pay that much for AMP?
Corporate Australia has a rich history of overpaying for the right to be big, bigger, the biggest. While size may help fatten the wallet of the steward steering the ship, it is often the case that investors, particularly those late to the party, see their wallets lose weight.
When ABC Learning bought all those centres and Wesfarmers bought Coles, it was obvious that the prices being paid were much higher than a rational and patient value investor would pay. Justified with promised synergies however, many acquisitions can be made to look good, disguising the real he’s-got-one-so-I-want-one-too motivation.
Turning to the AMP/Axa deal I should first point out that I am not suggesting either company is in the same boat as ABC Learning. What I will say though is that ultimately a business is worth some multiple of its equity and that multiple must be related to its profitability. Talk surrounds the possibility that Axa could be the recipient of another bid – although none has been forthcoming and with wealth management being a key growth strategy for the banks, there is also talk that ANZ might bid for AMP. The hunter becomes the hunted. Ignoring the cliches, the rumours and share price gyrations, we can value Axa and decide whether we like AMP management’s capital allocation strategy. We can also value AMP and decide, if ANZ make a bid, what we think of them.
Turning first to Axa; AMP has, with cash and shares, bid about $5.40 per share. Unsurprisingly Axa shareholders want a higher bid. Well of course they do. I would rather receive a few million more for my house too. But Axa’s performance doesn’t justify a higher bid and AMP needs to be prudent. According to analyst estimates of EPS, Axa will generate a return on equity of about 13 percent over the next two years. With the exception of the 2008 loss, the return on equity for the last ten years has ranged between 6.8% in 1999 and 27% in 2003. Based on the forecast ROE and a payout ratio of between 61% and 67%, Axa’s 2010 equity of $2.58 per share is worth a little more than $3.00 per share. The market believes AMP will bid more and so the shares are trading at $5.84.
With AMP at $6.35 – up from its lows earlier this year of $3.52 – the price does not reflect the actual value of the business which is between $4.53 and $5.24. Should ANZ bid even more than the already optimistic price, it would reflect a genuine me-too strategy over at ANZ.
Nothing gets the blood racing more than a takeover and when blood leaves the head for other regions, common sense usually follows.
By Roger Montgomery, 23 November 2009
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Martin
:
Hi Roger,
When valuing financials is there another parameter to add? I remember reading something from Buffett saying you had to do something different when valuing banks? The reason I ask is that using the standard method RHG seems to be very cheap?
Thanks,
Martin
Roger Montgomery
:
Hi Martin,
I use the same models I use for everything else with the banks but I can see RHG needs special treatment if you believe it is in run off. I haven’t seen the latest announcements. If they have put some meat around the strategy it would explain the issue of options to executives some time back when it appeared to conflict with the run off situation back then.
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Jason
:
Let’s just hope that anz don’t bother unless they can get amp for half their market cap. I think the management of anz were more prudent than the other three on how they went about their dilutionary raisings this year, so hope they remain prudent now.
Digressing somewhat Roger, I know you’ve said cba is the clear pick of the banks because of the benefits of the bankwest purchase, but it was disappointing the way the board panicked earlier this year and carried out the capital raising right at the bottom of the market!