Schemers and suitors
There was something rather odd about Craig Dunn presenting AMP’s proposed bid for AXA Asia Pacific as if it were a live offer rather than a proposed scheme of arrangement that had just been emphatically rejected by the intended target. Transurban’s aspiring bidders, and its directors, are in the same ill-defined ‘phoney war’ space.
Schemes of arrangement empower the target company board. They can’t succeed without their endorsement. At this point, given that both AXA Asia Pacific (AXA APH) and Transurban did say no to the schemes proposed, there are no offers on the table.
That hasn’t, of course, stopped their suitors from acting as though they had actually made real offers capable of acceptance. Canada Pension Plan and Ontario Teachers’ Pension Plan haven’t withdrawn quietly and neither have AMP and its proposed partner and AXA APH’s majority shareholder, France’s AXA SA.
Having failed to convince directors of their targets to engage, they are trying to circumvent them by taking their cases directly to shareholders (in Transurban’s case security holders), presumably hoping that if enough of them want an offer they will be able to use their support as leverage to keep any increase in the proposed offer price to a minimum.
That there will have to be an increase if either bid is to get anywhere is certain, unless the external environment changes. The Transurban board and AXA APH’s independent directors, having summarily condemned the proposed offer prices as inadequate, can hardly endorse anything less than a material increase in the value on offer.
Both defending boards face a delicate challenge. Quite apart from the uncertainty and volatility of the times, which tends to make any prospective premium more attractive to shareholders, both the Canadians and AXA SA (which is contributing the vast majority of the value AMP is offering) are driven by strategic considerations and time horizons that are very different to those of ordinary institutional investors still recovering from the ravages of the global financial crisis.
For the pension funds, Transurban’s crisis-tested toll-road revenues are a perfect match for their 30-year-plus liability profiles. For AXA SA, the AMP bid is the latest attempt in a 15-year quest to get its hands on AXA APH’s Asian businesses and their long-term superior growth prospects.
Transurban directors are confronted with the challenge of getting their investors to think beyond the crisis and beyond their six to 12-month return expectations and instead to focus on the unique and long-term value of its portfolio of toll-roads with their built in CPI-plus growth profiles.
AXA APH needs its shareholders to think about the implications of the $8.24 billion AXA SA is prepared to pay for the Asian businesses.
AXA APH and AMP’s share prices have, over a long period, been almost perfectly correlated.
Given that AMP has no meaningful operations outside Australia and New Zealand, that would suggest the market awarded the Asian businesses no premium relative to the Australasian operations, yet AXA SA has demonstrated it is prepared to pay a substantial premium for them (which probably says they are worth even more to it than the dollars it committed to the proposal).
The Transurban directors face a less complicated task than AXA APH’s in dealing with what was a straight cash proposal. Either the Canadians put a price on the table that is compelling and reflects the directors’ view of value or the directors can simply refuse to cooperate with and endorse a scheme.
There would, of course, be nothing to stop the pension funds from making a conventional hostile bid, going directly to security holders and forcing the board to more formally argue its case for rejection.
However, schemes are more certain. They lock in the support of the incumbent boards, they reduce the risk of hold-outs and they make it more difficult for competing proposals to succeed by locking up the target company board. They do, however, give the target leverage.
The AXA APH board, if AMP and AXA SA continue to promote their proposal, have to convince their shareholders to think of their businesses and their value as two quite discrete assets.
AXA SA has put a floor price – and quite an attractive one – under the Asian assets, but AXA APH’s has no ability to promote an auction because of the French group’s 53 per cent shareholding. However, AXA SA can’t afford another failure so there ought to be some prospect of a higher valuation of the Asian businesses.
The proposed merger, mainly scrip with a small amount of cash, of AMP with AXA APH’s Australian operations is, in concept, attractive. It would create a very large, albeit geographically constrained, Australasian wealth management business and generate $120 million a year of after-tax synergies.
Those synergies and the premium AXA SA is prepared to pay for the businesses it wants would enable AMP to make an offer that will interest AXA APH shareholders while protecting the interests of its own shareholders.
The sharp rise in AMP’s share price after the market had digested its proposal and in the face of a potential significant issue of AMP scrip to AXA APH shareholders, signals a belief that a deal would be good for AMP – which probably means, if that rise is sustained, that there is potential for AXA APH shareholders to gain a greater share of the combined businesses without undermining the longer term appeal of a deal.
The introduction of AMP to AXA SA’s ambitions is clever, because a straightforward AXA SA offer would generate no synergies whereas AMP’s involvement creates prospective value without either AXA SA or AMP having to finance that extra value.
If AXA APH were able to promote an auction for its domestic operations, of course, it might well be able to produce a better outcome for its shareholders and perhaps a more certain one.
AXA SA ought to be indifferent to the fate of the Australasian operations – AMP is a partner of convenience that will help with the funding burden and probably reduce the risk of AXA SA’s ambitions being thwarted by the Foreign Investment Review Board. Any of the big domestic banks would do the same and would have similar synergies to AMP, although the federal government might prefer a bigger non-bank competitor to further bank-led consolidation.
AXA SA did give open-ended undertakings to the government when it was allowed to buy into what was then National Mutual in 1995, promising to maintain local equity and to make the locally-listed entity the primary vehicle for any Asian expansion.
Re-nationalising the Australasian businesses within AMP might reduce the sensitivities associated with AXA APH’s loss of the Asian growth story, although the policy makers might be concerned that one of the larger and more successful locally-headquartered groups with significant Asian operations might have its engagement with the region severed.
It is conceivable that neither the Canadian pension funds courting Transurban nor AMP/AXA SA will end up making an offer or convincing their targets to endorse a scheme.
It is unlikely either will mount a conventional hostile offer because the pension funds need 100 per cent of Transurban to take it out of the listed environment and AMP and AXA SA need AMP to achieve 100 per cent of AXA APH before they can carve it up and enable AMP to access the synergies.
That gives the target boards considerable negotiating leverage, if they choose or are forced to engage with their suitors. If the pension funds or AMP/AXA SA want to promote their proposals, eventually they will have to put enough value on the table so that those directors have no choice but to engage.
There is, or at least ought to be, a premium price to be paid for choosing the scheme of arrangement route and effectively giving the target groups’ directors a veto over the proposal.
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