Tokio Marine Holdings agreed on Wednesday to buy Houston-headquartered HCC Insurance for about $7.53 billion in cash, the biggest foreign purchase by a Japanese insurer on record.
The acquisition by Japan's biggest insurer by market capitalisation tops domestic peer Dai-ichi Life Insurance’s $5.71 billion purchase of Protective Life last year. The deal is also the third-largest Asia Pacific overseas acquisition so far this year, pushing M&A volume for the region to a record $93.6 billion.
Japanese companies are the most acquisitive in the region as they seek growth outside their own moribund market. They have racked up $28.6 billion-worth of deals and account for 31% of the region’s total volume of outbound deals, followed by Hong Kong and China with $23.1 billion and $20.2 billion, respectively.
The Bank of Japan's aggressively expansionary policies and yen’s subsequent fall against the dollar to its weakest level since the summer of 2007 has magnified the cost for Japanese firms looking to buy overseas but that has not daunted the country's determined corporate shoppers.
Tokio Marine is paying $78 a share, valuing HCC at 1.9 times its book value based on its share price on March 31 of $41.03. The acquisition price also represents a 35.8% premium to HCC’s average share price over the past month and a 37.6% premium to its share price as of close of business on June 9.
The valuation "must be considered full," said David Threadgold of research specialists in financial services, Keefe, Bruyette & Woods. "However, we regard HCC as a high-quality franchise whose well diversified portfolio of highly profitable, non-cyclical businesses seems to fit well with [Tokio Marine's] existing US subsidiaries."
Tokyo-based analyst Makarim Salman at Jefferies, similarly, said a 1.7 times price-to-book valuation could have been a more appropriate multiple but that the difference would be made up. "This ¥100 billion gap can, as always in Tokio's case, be rationalised by the swapping of cash earning zero and very cheap debt for a 12% [return-on-equity] company," he said.
Japanese companies are winning auctions because they have more firepower than their global peers: after decades of austerity they are sitting on a record 87 trillion yen ($730 billion) in cash, according to Tokyo-based stock analysts. The country’s banks, which largely escaped the global financial crisis, are also keen to provide acquisition financing.
As a result, Japanese shoppers paid an average premium of 37.45% to the target’s share price in the month prior to the bid, significantly above the global average of 29.36% for cross border deals announced during the first three months of the year, Dealogic data shows.
Tokio Marine will use a combination of cash on hand and borrowings to finance the HCC deal.
Tokio Marine's management has known HCC for a long time as a strong company and has monitored it as an excellent candidate for M&A, management said on a conference call. Tokio Marine started considering the transaction a few months ago. The Japanese firm initiated the deal.
HCC has no significant overlap with Tokio Marine’s existing operations. In a statement, Tokio Marine said its forecast for adjusted ROE this financial year will increase by 1.5% to 9.3% as a result of the acquisition and that its 2015 forecast adjusted earnings per share will rise by 12% to ¥480 on a pro forma basis.
HCC has an impressive record of high profitability and low volatility to give a 10-year average ROE of 12.6%, analyst Threadgold said.
The price tag includes about $30 million in advisory fees. Goldman Sachs is advising HCC while Evercore Partners and Credit Suisse are advising Tokio Marine. Debevoise & Plimpton LLP gave legal advise to Evercore Partners.
Foreign forays
HCC is the latest in Tokio Marine’s string of foreign acquisitions and its largest to date as it seeks growth overseas.
Since data provider Dealogic’s records began, the Japanese insurance group has announced 105 deals for a combined total of $26.6 billion. Cross-border transactions account for the majority of deals with $17.7 billion-worth of business spread across 31 transactions.
Tokio Marine has been making acquisitions in developed countries as well as emerging countries.
It entered the Lloyd’s market through the acquisition of Kiln Ltd. in March, 2008. It also broke into the US market through the acquisition of Philadelphia Consolidated Holding in December, 2008, and the purchase of Delphi Financial Group in May, 2012.
In emerging markets, it has expanded in Southeast Asia and Latin America.
HCC has operations in the United States, United Kingdom, Spain, and Ireland.
“The acquisition accelerates growth in scale and profits for the International business of Tokio Marine Group resulting in a more globally diversified portfolio,” the group said in a statement.
Tokio Marine held a briefing on its medium-term business plan on May 29. The plan covered the three years through 2017. The company said it will target an adjusted ROE of 9% and adjusted net profits of ¥350 billion to ¥400 billion and said it expects domestic and overseas property & casualty insurance to be a key driver of earnings growth.
HCC has property & casualty, accident & health, and other specialty insurance businesses. It said its long-term vision of the company is to have a 50:50 split between domestic and overseas operations.
The purchase is expected to close between October and December.
