Dai-ichi Life Insurance is reportedly in talks to acquire NYSE-listed Protective Life for Y500 billion ($4.9 billion), in line with its stated plans to expand overseas, but questions remain over the funding.
Citing reports that it was looking to buy Protective Life and mulling a Y200 billion share sale to help fund it, the company said it was looking at various US life insurance investments and different funding options, including an equity share sale, but that nothing has yet been decided.
Japanese insurance companies have made several foreign forays in recent years beyond their stagnant domestic market and Dai-ichi Life has been among the most aggressive.
“[It's] no surprise to us,” said Nomura analyst Wataru Otsuka, citing Dai-ichi Life’s medium-term business plan, in which it played up the potential for overseas mergers and acquisitions.
But in the quest for more growth abroad, Japanese insures have sometimes paid eye-popping prices. So equity analysts are focused on how Dai-ichi Life, Japan's second-largest private-sector life insurer, plans to raise the capital needed to fund the purchase of Protective Life and on the exact synergies that it hopes to squeeze out of any deal.
They are also eyeing the impact on Dai-ichi Life’s capital adequacy ratio, which was 124% as of end-March.
Precedents
When Japan’s MS&AD Insurance Group bought a 50% stake in the life-insurance unit of Indonesia’s Sinar Mas for about Y67 billion in 2011 many bankers and insurance experts were surprised at the price offered.
MS&AD paid a price that was 4.7 times the company's book value (as of December 2010), three times the embedded value in a report by actuarial firm Milliman, and a price-to-earnings multiple of 13 times, all prior to the capital injection.
But despite the astonishment among bankers that bid prompted, valuations have continued to rise: Japan’s Dai-ichi Life agreed last June to buy a 40% stake in Indonesian life insurer Panin Life for IDR3.3 trillion (Y34.3 billion).
Dai-ichi Life paid a price to book multiple of 11.8 times, a price to earnings of 40 times (as of December 2012) and an embedded value multiple of more than five times, all pre the capital injection.
Shares in Dai-ichi Life stabilised Tuesday, closing slightly higher after losing about 5% in Monday trade as reports of its potential US acquisition emerged.
