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March 08, 2010 at 07:00 PM
Analysts are giving MetLife Inc’s proposed $15.5 billion acquisition of American Life Insurance Company from American International Group Inc. good reviews.
AIG, New York, will be getting cash and assets it can use to pay off what it owes to the Federal Reserve Bank of New York, and MetLife will get a bigger presence in the fast-growing Asia-Pacific region, the analysts say.
Jimmy Bhullar and Erik Bass, analysts for JP Morgan Securities Inc., New York, write in a research memo that the deal “enhances MetLife’s franchise and improves the company’s return profile. Also ALICO provides MET with a platform for growth in higher-return foreign markets, primarily Japan.”
“The [AIG sale] expands MetLife’s reach into the Asian region,” says Stewart Johnson, a portfolio manager at Philo Smith & Company, Stamford, Conn. “Coming into the deal, Asia constituted perhaps 15% to 20% of MetLife’s revenue. This buyout will more than double MetLife’s book of business in the region.”
While ALICO operates in more than 50 countries worldwide, Johnson adds, Asia represents the greatest market opportunity for the AIG unit. He cites population growth and still low market penetration as key drivers underpinning the insurer’s expansion into the region.
The deal helps to establish a foothold–if minor–in other parts of the world, says Johnson.
“But the major stakes in the ground are in Asia,” he says. “And the main company that will be feeling that stake in the ground is Prudential Financial, which also has a significant presence in the region. This certainly spices up the rivalry between the two companies.”
Johnson says the deal may have been eased by the fact that AIG Chief Executive Officer Robert Benmosche was the former CEO of MetLife. Benmosche, 65, spent 8 years at the helm of MetLife. In 2000, he led the transformation of the insurer from a mutual company to a public company.
While expressing confidence in Benmosche’s leadership of AIG, Johnson is less sanguine about the insurer’s long-term outlook. He regards the ALICO sale as an “unfortunate, but necessary” move by the company to reduce a still substantial debt owed to the federal government amassed since its financial rescue in 2008.
While viewing the transactions as a positive from a competitive standpoint, JP Morgan’s Bhullar believe that MetLife overpaid for ALICO considering “limited competition for the deal.” Based on the analysts’ calculations, the transaction values ALICO at more than 10 times earnings and above 1.2 times book value.
“While these multiples seem reasonable, they are considerably higher than the sector’s current valuation of 8x 2011 EPS and 0.9x book value,” they write.
