AIA seeks $14.9 billion from Hong Kong listing

AIA Group, the pan-Asian life insurance unit of American International Group, yesterday kicked off its eagerly awaited initial public offering which is seeking to raise between HK$107.65 billion and HK$115.3 billion ($13.9 billion to HK$14.9 billion).

The deal is made up entirely of secondary shares that will be sold by the parent company, which is on a quest to raise enough capital to repay the $182.3 billion government bailout that it received in 2008. According to sources, AIG will sell 48.6% of the company as part of the base deal, which implies an equity value between $28.6 billion and $30.7 billion for AIA as a whole.

Some media reports have suggested that this is lower than what AIG may have hoped for since the takeover bid from UK insurance company Prudential earlier this year valued the company at $35.5 billion. However, the acquisition of an entire company will always require a takeover premium and sources close to the IPO have always maintained that a valuation just above $30 billion was the most likely. And since AIG will hold on to the rest of the company for a while – the lockup allows it to sell 50% of its remaining shares 12 months after the IPO and the other 50% after 18 months – there is a clear possibility that the share price will go up and enable it to sell the rest of the company at a higher valuation later.

Given the size, it seems reasonable for the company not to push the valuation too much as it needs a strong reception for the deal in order to raise the money it needs. Most urgently, AIG is said to be looking to use the IPO proceeds to buy back $13.6 billion worth of preference shares issued to the US government.  

To help underpin the interest, AIG will give up its majority shareholding in AIA if most of the 15% greenshoe is exercised – something which many investors have indicate would make them more comfortable to buy the stock. If AIG holds only a minority, then AIA will not be subject to any restrictions related to the government shareholding in AIG and also will be able to detach itself much more from its troubled parent. If the greenshoe is exercised in full, the free-float will be 55.9% and AIG’s stake will fall to 44.1%.

In the latter scenario, the total deal size could increase to as much as $17.1 billion (depending on the final price), which would make it the largest IPO in Hong Kong ever ahead of ICBC’s H-share IPO which totalled $16 billion. The rest of ICBC’s $21.9 billion IPO was made up of Shanghai-listed A-shares. Agricultural Bank of China, which raised $22.1 billion in the world’s largest IPO three months ago, raised only $12 billion from the Hong Kong market.

And AIA does have the option to increase the deal even further as the IPO comes with a 20% upsize option, which may be used if there is very strong demand from high-quality investors. Depending on the final price, this could increase the deal size by between $2.8 billion and $3 billion.

“The more AIG can sell, the better, as it reduces the size of the overhang and a smaller government ownership makes investors more comfortable,” said one source. A larger free-float will also have implications for the demand from index funds as the inclusion into most indices is weighted according to the free-float, he added.

The decision of whether or not that option will be exercised will likely not be made until close to the end of the bookbuilding, which is scheduled to last for almost two weeks.

But so far, so good. According to sources, the deal received a positive response on the first day and as of last night the deal was already covered by institutional orders alone. The early investors were said to include sovereign wealth funds, high-net-worth individuals and Hong Kong tycoons. Ahead of the launch yesterday, US investment fund Fairholme, which is the largest institutional shareholder in AIG, also said it had put in a firm order of $1.1 billion for AIA shares.

Sources noted that Fairholme, which is founded by Bruce Berkowitz, had been in discussion with the bookrunners about supporting the deal, but because of statutory restrictions that prevents the fund from agreeing to a lockup, it couldn’t participate as a cornerstone. Hence it is coming in as an anchor instead, which means it may get a large allocation, but isn’t guaranteed the full amount.

AIA has signed up five other cornerstones, however, which have jointly committed to buying $1.92 billion worth of stock that will be subject to a six-month lockup. The largest among them is the Kuwait Investment Authority, which will buy $1 billion worth of stock. KIA also invested $800 million as a cornerstone in Agricultural Bank of China’s IPO and seems to be getting a taste for Hong Kong-listed stocks. The others are: the Guoco Group with $420 million; Malaysian pension fund KWAP with $200 million; and Hong Kong tycoons Peter Woo of the Wharf group and Cheng Yu-tung of Chow Tai Fook, who will buy $200 million and $100 million of stock respectively.

AIG is offering approximately 5.857 billion AIA shares at a price between HK$18.38 and HK$19.68 apiece. This values the Asian life insurer 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. The 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. The price range also implies a price-to-new business multiple of 8.6 to 11.8 times, according to a source.

Prudential’s initial bid for AIA was valued at 1.67 times embedded value as of November 30, although the embedded value at the time was a bit lower at about $21 billion. The price range pitches AIA at a similar valuation to other regional players, such as AXA Asia Pacific Holdings or Southeast Asia-focused Great Eastern. AXA is currently trading at a 2010 price-to-EV multiple of 1.5 although without the inflation caused by M&A expectations this would be more like 1.2 times, analysts argue. Great Eastern is also trading at 1.2 times. Looking at players that focus on just one market, Korea’s Samsung Life and Korea Life trade at about 1 time EV, while the Chinese life insurers are valued at between 2.0 and 2.7 times.

AIA’s unique pan-Asian focus – it has operations in 15 countries across Asia-Pacific and a leading position in six – as well as its strong profitability, should put it somewhere between the other regional players that have a smaller footprint and the fast-growing Chinese insurers, analysts argue.

Ten percent of the offering will be earmarked for Hong Kong retail investors through a public offering that will run from October 18 to 21. The retail tranche may be increased to a maximum of 25% of the base deal through a clawback mechanism in case of strong demand. A yet to be determined portion of the deal will also be offered to Japanese retail investors through a so called Public Offer Without Listing, or POWL, that will be arranged by Nomura and Daiwa. The shares for the POWL will come out of the institutional tranche, and is expected to account for less than 5% of the total deal.

The final price will be fixed after the close of US trading on October 21 and the trading debut is scheduled for October 29. The roadshow is a few days longer than for a usual Hong Kong listing, which sources say is primarily caused by the fact that most investors want a chance to meet AIA’s new chief executive, Mark Tucker. Tucker, who was brought on board in July, has a long career with Prudential behind him, including hands-on experience of running Pru in Asia for nearly 10 years, and was most recently group CEO from 2005 to 2009. All eyes are now on him to reignite AIA, which, according to one syndicate research report, has been “under-managed’ over the past decade resulting in a slow erosion of the franchise. Most analysts agree, however, that as the leading regional player, the company has a lot of opportunity to benefit from the continued development of the life insurance industry in Asia.

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.