Primus consortium and AIG amend Nan Shan purchase agreement

$325 million of the purchase price will be placed in escrow to support Nan Shan's capital ratio as Primus and China Strategic try to convince the Taiwan regulator to approve the acquisition of the life insurer.

Primus Financial Holdings and China Strategic Holdings, which agreed to buy Taiwanese insurer Nan Shan Life Insurance from American International Group last October for $2.15 billion, said on Friday that they have amended the purchase agreement to provide additional support for Nan Shan's capital ratio.

Under the revised agreement, $325 million of the purchase sum will be placed in escrow for a four-year period, supposedly in a bid by the Primus-led consortium and AIG to finally secure regulatory approval for the transaction. AIG needs the money as it attempts to repay a $182.3 billion bailout by the US government in 2008 and would be particularly keen to ensure that this deal goes through now that Prudential plc's proposed acquisition of its Asian life insurance arm, AIA Group, has fallen through. 

Primus, a private equity-backed and Asia-based financial services holding company that was launched last year by former Citi banker Robert Morse and two ex-colleagues of his, and Hong Kong-listed China Strategic were declared the buyers of Nan Shan eight months ago following a competitive auction, but the deal has still to get the go-ahead from Taiwan's Financial Supervisory Commission (FSC). The regulator has reportedly expressed a series of concerns, including talk that China Strategic may be backed by Chinese money -- a politically sensitive issue in Taiwan -- and that the consortium didn't have any direct experience in running an insurance company. Nan Shan is the largest life insurance company in Taiwan by book value and has more than 4 million customers.

As noted, Primus was formed only last year and Nan Shan was its first agreed investment. China Strategic is a Hong Kong-listed investment firm and one of its main business areas is manufacturing and trading of battery products and related accessories. Initially, Nan Shan was to be bought by a holding company 80% owned by China Strategic and 20% owned by Primus.

However, Morse's fellow co-CEO at Primus, Wing-Fai Ng has a background with Taiwanese financial conglomerate Fubon Financial, where he was in charge of the group's overall strategy, M&A activities and all major change programmes related to the bank and the securities firm as well as the insurance divisions.

A few weeks after the initial acquisition agreement, Primus and China Strategic also struck a deal to sell 30% of Nan Shan to Chinatrust Financial Holding Company, which owns and operates Taiwan's largest bank, for $660 million. The deal, which is conditional upon the Primus-led consortium getting regulatory approval for its purchase of Nan Shan, addressed the fact that the Taiwan regulators, while the auction process was still ongoing, supposedly expressed a preference for buyers with a local partner.

Chinatrust had shown a keen interest in Nan Shan all along and also put in a bid in the auction. The deal with Primus and China Strategic includes an option for the Taiwanese lender to increase its stake in Nan Shan after three years. Around the time of the agreement, Chinatrust representatives were reported to have told the Taiwan media that it wants to own at least 50% of Nan Shan.

This latest move will provide some additional comfort with regard to Nan Shan's financial health. If the company's risk-based capital ratio should fall below the required 200%, the owners will be able to tap into the $325 million that are now being set aside.

"This further assures Nan Shan of its continued stability. It is an endorsement of our consortium, and of the long-term future of Nan Shan," Primus chairman and co-CEO Morse said in an announcement. And added: "We are more confident than ever in the success of the sale of Nan Shan to the Primus Financial-China Strategic consortium."

Indeed, the hope is obviously that this will sway the regulators in favour of the deal. However, people familiar with the transaction said over the weekend that there is no agreement or understanding with the regulators to that effect. Also, given the fact that the money going into escrow is part of the purchase price, the party making a concession here isn't really the Primus-China Strategic consortium, but AIG -- as the US insurer will now have to wait four years to get part of its money.

The willingness to agree to this gives some indication of how keen AIG is to complete the deal.

On its website, The Wall Street Journal quoted AIG as saying that the decision to put money in escrow is part of "the ongoing collaboration with the regulatory authorities in Taiwan to complete the sale of AIG's stake in Nan Shan".

AIG's share price finished down 0.6% to $35.08 on Friday after the revised agreement was announced after falling as much as 2.5% intraday. The Dow Jones index finished up 1.1%, having traded in negative territory for most of the session.

AIG is being advised on the sale by Morgan Stanley and Blackstone Advisory Partners, while Primus is being advised by Deutsche Bank.

Primus was set up with the aim of acquiring and growing financial services companies in the insurance, brokerage, advisory, banking and wealth management industries. In April this year, it agreed to buy a controlling stake in US-based inter-dealer broker Chapdelaine & Co.

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