Fortis will pay HK$3.5 billion for 50.48% of PCI. Yuen Tin Fan Francis, executive chairman of PCI, described the deal as a logical next step in the evolution of PCI saying: ôRichard Li and I sought to identify a buyer who could take PCI to a higher platform of growth. Fortis is such a buyer.ö
The 50.48% stake in PCI is owned by five parties: Singapore-listed Pacific Century Regional Developments (75% owned by Richard Li) owns 44.94%; Yuen directly and through his trust, Snowdon International, owns 3.85%; and the balance is owned by three individual shareholders and another trust.
Yuen clarified that despite his own shares forming part of the sale, he is ôcommitted to continue working for PCI for at least one year post-acquisition and eight top executives have committed to remain for at least six months.ö Yuen and PCRD have agreed a non-compete with Fortis whereby neither one nor any PCRD group company will undertake any competing business for a period of 24 months.
The price represents a multiple of 1.38 times 2006 embedded value, the most commonly accepted ratio for insurance industry deals. (Embedded value is calculated by adding the adjusted net asset value and the present value of the future profits.)
Sources close to the deal comment that it is in the ballpark range of recent insurance industry deals. In June 2006, AXA acquired Credit SuisseÆs insurance division, Winterthur, at a price to embedded value multiple of 1.6 - although this business, which encompassed Europe and Asia, is not strictly comparable to the single location PCI. Earlier the same year, AXA acquired National Australia BankÆs insurance business in Hong Kong and Indonesia at a 1.55 multiple. Further back, in June 2005, Sun Life Financial acquired the Hong Kong insurance and pension operations of the Commonwealth Bank of Australia at a multiple of 1.3.
Dennis Ziengs, CEO of Asia for Fortis, says the deal ôis the first majority stake acquired by Fortis in insurance in Asia and this, for us, is very big newsö.
The purchase price translates to a per share price of HK$8.18 representing a premium of 58.2% to PCIÆs closing price on February 23. Ziengs said the significant premium was because ôthe traded price did not fully reflect the last financial yearÆs performanceö (which PCI just announced this week, showing a significant improvement in key parameters. Embedded value, for example, increased 25%). Ziengs also highlighted that ôrecent deals in Hong Kong where a majority stake has change hands have been concluded at a significant premium to market priceö.
The deal is subject to various approvals, including shareholder approval. Fortis will make a mandatory general offer to all minority shareholders at the same price agreed with PCRD and other selling shareholders, pursuant to receipt of approvals. Ziengs did not disclose whether the preferred result is to delist PCI, saying only ôit is under considerationö. Fortis will have to ensure there is a genuine free float of at least 25% of PCI's outstanding share capital, should it choose to stay listed. If the choice is to delist, 90% of the remaining 49.52% minority shareholding of PCI must be tendered for Fortis to privatise the company.
Fortis is an international financial services provider active in insurance and banking with offices in 105 countries. The PCI deal gives the insurance business of Fortis a strong platform in a developed Asian market, namely Hong Kong, alongside its operations in Asia's emerging markets: China, India, Malaysia and Thailand.
Ziengs went on to say the ôacquisition is very much in line with our Asia expansion strategy embarked on earlier this decadeö. He also commented that Fortis appreciated the developed legal and regulatory framework in Hong Kong as well as the lack of restrictions on foreign ownership in insurance.
Ziengs termed the deal ôthe second leg of our Greater China platform after our successful investment in Taiping Lifeö although he evaded specific questions about how a strategy which leveraged both PCI and Taiping Life would be developed.
PCRD acquired its insurance business in 1994. Yuen joined Pacific Century Group two years later in 1996, after a career in banking and finance including a stint from 1998-91 as CEO, Hong Kong Stock Exchange and 1992-1994 as a member of the NASDAQ advisory board. With his background in finance, Yuen was a natural to grow the insurance business, PCI. In June, 2006 Yuen stepped down from other Pacific Century group positions to focus full-time on his role at PCI. He has no doubt been hard at work, as a brief nine months later he has announced a very lucrative exit from PCI for Richard Li and himself.
As for Richard Li himself, after spending the better part of 2006 trying to put together a deal to sell PCCW, it seems almost ironic that he has so quickly sewn up a deal for PCI. It only remains to be seen what new business he will deploy the proceeds in. One thing seems certain. Private bankers must be busy seeking appointments with the Li family given the assets Richard and his father K.S. Li have cashed out of in just the first quarter of 2007.
Fortis was advised by Morgan Stanley and PCI by JPMorgan.