AIA raises $17.8 billion, remains on track to be third largest IPO in the world

It came as no surprise that AIA Group priced its Hong Kong initial public offering at the top of the range as the global coordinators had been steering investors towards the maximum price for at least a week. The crucial issue instead was whether the Asian life insurance arm of US-based American International Group (AIG) would also be able to exercise its 20% upsize option – desired by investors because it would increase the free-float and reduce the influence of its US government-controlled parent and coveted by AIG because it would have more money to repay the government bailout it received in 2008.

And when it emerged that the total demand, including the cornerstone tranche, amounted to $130 billion, AIG grabbed the opportunity with both hands and sold as many shares as it could.

With the top-end pricing, at HK$19.68 per share, and the upsize option exercised in full, the total deal size finished at HK$138.39 billion ($17.8 billion), confirming the deal’s status as the largest IPO in Hong Kong and also the largest ever IPO in the insurance sector, ahead of Dai-ichi Life Insurance’s $11.1 billion offering in March this year.

However, all eyes are now on whether AIA will also be able to exercise its 15% greenshoe option in full, which would push the deal size to $20.5 billion and make it the third largest IPO in the world after Agricultural Bank of China’s $22.1 billion deal in July and Industrial and Commercial Bank of China’s $21.9 billion listing in 2006.

A full exercise of the greenshoe option would also reduce AIG’s stake in AIA to 32.9% from 41.6% at the time of listing. Before the IPO, AIG owned 100%. All the IPO shares are secondary shares sold by AIG, meaning the US insurer will get all the proceeds from the offering.

Given the huge over-subscription rate, which led to a significant scale-back of most institutional orders, there would seem to be a good chance of additional buying in the secondary market as investors seek to top up their allocations. However, the after-market demand will also depend on the overall market conditions when the stock starts trading, so nothing is certain. AIA will debut on Hong Kong’s main board on Friday. 

While Agricultural Bank of China was extremely focused on the final deal size and made no secret of the fact that it was after the record as the world’s largest IPO, AIA was more focused on valuation than price. Therefore, it is likely more important for AIG to have been able price the IPO at a slight premium to Prudential’s revised bid earlier this year, than whether it is the third or fifth largest in the world – it currently also ranks behind the IPOs of Visa in 2008 and Japan’s NTT Mobile Communications Network in 1998. In a way, the slight premium proves that AIG’s board was right in turning down the Prudential bid, even if it was a big gamble at the time.

Prudential initially offered $35.5 billion to buy all of AIA from its parent, but after failing to drum up enough support from its own shareholders, many of whom felt the price was too steep, the UK insurance company attempted to renegotiate the terms with AIG and at the end of May tabled a reduced bid of $30.4 billion. But AIG didn’t accept the lower offer, leading to the collapse of the deal.

The IPO price of HK$19.68 per share values the whole of AIA at $30.6 billion. Considering that a takeover of an entire company would typically include some form of control premium, while an IPO is usually done at a discount to the estimated fair value, AIG have done quite well out of this offering. Not only did it get a slightly better price than what Prudential was prepared to pay, but it still owns a big chunk of AIA that it can sell at a later stage, when the price may have increased further.

AIA is subject to a lockup after the IPO, but will be allowed to sell 50% of its remaining shares 12 months after the listing and the other 50% after 18 months.

To be sure, some observers argued that the price range was set to attract investors’ attention. This was especially true at the bottom of the range, although even at the top the deal was said to have been quite attractive – especially if you believe the turnaround story and the growth opportunities outlined by new CEO Mark Tucker during the roadshow. 

The price range of HK$18.38 to HK$19.68 per share valued AIA at 1.23 to 1.32 times its embedded value (EV) for 2010, which is estimated at $23.12 billion based on the joint bookrunner average. That pitched AIA at a similar valuation to other regional players, such as AXA Asia Pacific Holdings or Southeast Asia-focused Great Eastern, but well below the fast-growing Chinese life insurers, which trade at between 2.0 and 2.7 times embedded value. The final valuation of 1.32 times is also at a sizeable discount to the price-to-EV multiple of approximately 1.5 that analysts view as fair value for AIA. Embedded value estimates the net worth of life insurance companies based on today’s net asset value, including the present value of profits from future premiums paid by existing policy holders, but excluding new business.

Institutional investors liked the rarity of being able to buy a liquid stock with large scale exposure across Asia that also offers a turnaround story. On top of that, AIA is also expected to go into several key indices, including the MSCI and FTSE series and Hong Kong’s benchmark Hang Seng Index, creating a natural demand among index funds and other fund managers who benchmark against these indices.

The institutional demand included several sovereign wealth funds (in addition to the Kuwait Investment Authority, which participated as a cornerstone investor and bought $1 billion worth of stock), insurance funds as well as large global funds in general. Hedge funds were drawn to the deal partly because of the valuation, but also because of the liquid nature of the stock, which should make it easy to trade in and out of.

ICBC International, which acted as a joint bookrunner, also brought in quite a lot of demand from corporate Chinese investors as well as from high-net-worth players and its own QDII fund, sources said.

Asian investors were the most keen, which was reflected in the allocation with around 55% of the deal going to Asia-based accounts. Onshore US investors were given around 30% and European investors about 5% to 10%, a source said. The rest went to the Middle East and Japan.

Hong Kong retail investors weren’t as keen on this deal as institutional investors, however – perhaps because they were not as familiar with Tucker and his track record of having spearheaded Prudential’s growth in Asia for nearly a decade, perhaps because they still associate AIA with its troubled parent and the $182.3 billion bailout that it was forced to accept from the US government to prevent it from collapsing during the financial crisis.

Many retail investors also chose to put their bets on Sihuan Pharmaceutical Holdings, a Chinese manufacturer of cardio-cerebral vascular drugs that was in the market at the same time and which is expected to see significantly higher growth. While much smaller than AIA – the entire deal amounted to $741 million -- Sihuan attracted at least $30 billion of demand from retail investors, based on the fact that sources said the 10% retail tranche was more than 400 times subscribed.

By comparison, AIA’s 10% retail tranche, which amounted to approximately $1.48 billion, attracted just $14.4 billion worth of orders from retail investors – more than the $2.8 billion submitted for Agricultural Bank of China’s IPO a few months ago, but well below the $68 billion applied for in China Railway Construction Corp’s IPO in February 2008, which ranks as the most popular Hong Kong listing ever among retail investors.

This also meant that AIA’s retail tranche was slightly less than 10 times covered and hence didn’t trigger a clawback. After taking out the retail portion of $1.48 billion and the $1.92 billion cornerstone tranche, this left about $14.4 billion to be allocated to institutional investors, although about $300 million to $400 million of that was said to have been set aside for retail investors in Japan under a so called Public Offer Without Listing (POWL). The POWL attracted about $5.5 billion of demand, according to one source.

The new CEO and his team supposedly held about 90 one-on-one meetings with investors during the roadshow which lasted slightly more than two weeks, and with sources estimating that about 95% of these meetings led to an actual order, institutional investors clearly liked what they heard.

“This IPO worked because of the valuation, but there is also a huge ‘trust me’ factor for Mark Tucker,” one source said. Having joined AIA as recently as July, Tucker has come up with a strategy for how AIA shall be able to reverse its underperformance in recent years when it has been under pressure from the troubles at its parent company. However, he has revealed few details of the plan so far.

Speaking to the Hong Kong media via a video link from San Francisco last weekend, Tucker said the growth plans include: a focus on organic growth; an expansion into second and third-tier cities as well as a fresh recruitment strategy in China; an increased focus on bancassurance via a move towards long-term strategic partnerships, such as that struck with ICBC in September; leveraging the firm’s licences for Islamic takaful and shar’iah products in Malaysia and Indonesia; and an increase of the proportion of high-margin products.

AIG sold 5.857 billion AIA shares, or 48.6% of the company, as part of the base offering and another 1.17 billion shares through the upsize option.

Citi, Deutsche Bank, Goldman Sachs and Morgan Stanley are joint global coordinators, as well as bookrunners together with Bank of America Merrill Lynch, Barclays Capital, CIMB, Credit Suisse, ICBC International, J.P. Morgan and UBS.  The POWL tranche was arranged by Nomura and Daiwa.