What will happen to amp?

In early September, I made a call on AMP. I wrote:

“AMP’s shares closed up 4.9% to $1.62. If you have been a patient AMP shareholder, hang on for the ride. Those who enjoy an “informed punt” may also wish to consider.”

Notwithstanding the payment of a special dividend of 10c (which lowers the effective price to $1.52), until Friday, I had been looking pretty stupid. The funds outflow was worse than expected, and with ongoing scandals, it has remained deeply out of favour with investors, touching a low of $1.28 last Thursday.

Then out of left field came an indicative takeover bid from a US based investment management company called Ares Management Corporation, and the shares jumped 19.5% to $1.53. Today, they are up to $1.67. I am in the money!

But that’s the whole point. AMP is in play with only two possible outcomes: it will either be bought as a whole (and the buyer might then sell some of the parts), or the individual parts will be sold off by the AMP Board. There is zero chance of CEO Francesco De Ferrari executing his turnaround strategy. It is too late for that, and in any event, De Ferrari’s strategy was never going to work. He wasn’t the right person for the job.

As soon as new AMP Chair Debra Hazelton ordered a “portfolio review”, it was an admission that the inevitable was going to happen. Investment banks Credit Suisse and Goldman Sachs were appointed to advise, along with lawyers King & Wood Mallesons. These guys and gals only get paid ‘big time’ if there are transactions and deals to be done – asset sales, business sales or demergers that might even include an IPO – so you can guarantee that’s the type of recommendation that the AMP Board will be asked to consider.

Working on the basis that in AMP’s case that “the sum of the parts was greater than the whole”, I came up with the following valuation:

• AMP Bank, with its $20.5bn mortgage book and $17.0bn in retail deposits, I valued in the range of $1.0bn to $1.5bn, a multiple of 10.0 to 15.0 times the last 12 months’ adjusted profit. This is equivalent to 29c to 44c per share;
• AMP Capital, the multi-asset manager with $189bn in assets under management is a little easier to value. AMP recently repurchased a minority interest of 15% in AMP Capital held by Mitsubishi UFJ Trust and Banking Corporation for $460m. This values the business at $3.06bn. Add in a control premium for 100%, the valuation could stretch to $4.0bn (let’s put it in the range of $3.0bn to $4.0bn). This is equivalent to 87c to $1.16 per share;
• $700m of surplus capital at 30 June – worth 20c per share; and
• The troubled AMP Wealth Management and NZ Wealth Management. I ascribed no value to these assets (they have to be worth something, it is a question of how hard they are to untangle). The NZ business, for example, made $40m in the last 12 months.

All up, a low case of $1.36 per share and a high case of $1.80 per share. And that is not counting NZ Wealth Management or Australian Wealth Management, or of course some transaction and separation costs.

Which brings us to the indicative offer from Ares Management Corporation, a NYSE listed alternative asset manager with approximately $179 billion of assets under management and over 1,400 employees. Today, AMP said that Ares’ proposal is “at an implied value of $1.85 per share”. It goes on to say that “AMP emphasises the preliminary nature of the proposal and discussions between itself and Ares, and there is no guarantee that a transaction will eventuate and no certainty with regards to price”.

Ares, in its filing to the US Securities and Exchange Commission, said that: “it has made a confidential, non-binding indicative proposal to AMP consistent with its previously announced strategic review process. Any transaction would be subject to a variety of conditions and structural considerations, including extensive due diligence, evaluation of divestiture of certain assets or non-core businesses and may involve third party co-bidders”.

What should AMP shareholders do?

While the keyword is “indicative”, AMP would not be taking the proposal from Ares seriously and giving them access to the data room unless it felt that there was a reasonable chance of a firm offer materialising. Obviously, the $1.85 indicated price is seen by Directors as being around the mark.

But first offers are rarely the final offer, and with the whole company up for sale, the tabling of a public bid could well pull in other bidders or encourage those firms looking at components of the AMP business to up the ante.

I re-iterate what I said in September.  If you have been a patient AMP shareholder, hang on for the ride. Those who enjoy an “informed punt” may also wish to consider.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.