It would take a brave or stupid person to punt that AMP and AXA SA's revised takeover offer for AXA Asia Pacific of $12.85 billion will be anything but a slam dunk when the six independent directors meet this week. Besides upping the offer by an extra 54c, which is equivalent to an extra $1.16 billion in cash, and taking currency fluctuations out of the equation, the AXA Asia Pacific board, headed by Rick Allert, has also managed to squeeze something out for itself: an extra board seat on the merged entity.

Sydney Morning Herald - 15th Dec 2009 - Adele Ferguson

It would take a brave or stupid person to punt that AMP and AXA SA's revised takeover offer for AXA Asia Pacific of $12.85 billion will be anything but a slam dunk when the six independent directors meet this week.

Besides upping the offer by an extra 54c, which is equivalent to an extra $1.16 billion in cash, and taking currency fluctuations out of the equation, the AXA Asia Pacific board, headed by Rick Allert, has also managed to squeeze something out for itself: an extra board seat on the merged entity.

This means two of AXA Asia Pacific's six independent directors will be guaranteed a gig on the new board of AMP, if they accept the sweetened offer. For Allert, if the Westpac bid for St George Bank is any guide, he and another director will end up with a plum position on the merged AMP/AXA entity. For the French, they will get the prized Asian assets and be rid of the Australian and New Zealand business.

The inclusion of two guaranteed board seats is obviously important to the independent directors of AXA - otherwise they wouldn't have doubled them from one to two - but there are some other issues that will make the deal difficult to refuse.

The most obvious is that AXA SA, which holds 54 per cent of AXA Asia Pacific, has the power to make life difficult for the board if its offer is rejected.

For Allert, this boils down to three things: the company of which he is chairman would be controlled by a shareholder with a strategy that doesn't include Australia; the company's access to cheap debt would probably dry up; and any plans to beef up its Australian business via equity issues would be resisted.

All in all, this would not be a good place for AXA Asia Pacific at a time when its competitors are trying to get bigger to gain economies of scale as the spectre of profit margin pressures gets closer after the Cooper Review. In simple terms, AXA would be a shag on a rock as the rest of the sector consolidates around it.

It would also have to find new ways to source debt. AXA has $1.2 billion of debt sitting on its balance sheet and the entire amount is provided courtesy of the French. The average interest rate it pays on this is 2.42 per cent after tax, or 3.5 per cent before tax, considerably cheaper than anything it could negotiate in the open market.

In addition, AXA SA's strategy no longer includes Australia. This means if it fails in this bid, it will turn its attention to other Asian mergers, including ING's Asian wealth management business and American International Group's key Asian life insurance unit, AIA, which is valued from $US15 billion to $US20 billion.

That the deal is a slam dunk explains why hedge funds bailed out of AXA yesterday. They don't expect AMP and AXA SA to sweeten the offer further, and the chances of another party bidding for AXA at a higher price are slim.

Ipso facto, when the board says yes, the next step is a period of due diligence. Then comes the scheme of arrangement, which will be finalised "some time in the second quarter".

AXA SA/AMP are now offering $1.92 a share and 0.6896 AMP shares, which as of Friday's close valued the offer at $6.22 a share. AXA holders also keep their scheduled final dividend, expected to be 9.25c a share.

From an AMP shareholder point of view, 80 per cent of the revised offer is paid by AXA SA, with AMP lifting its cash paid by $100 million.

Like the other part of its cash offer, this will be financed by AXA SA. Yes, the French are lending AMP money to fund its cash part of the offer. On back-of-the-envelope calculations, this increased offer dilutes the original offer 0.5 per cent and makes it accretive to AMP by 1 per cent in 2011.

NAB wears the wealth management crown (following the purchase of Aviva in June), with a market share of 15.4 per cent, followed by Commonwealth Bank with 13.6 per cent, AMP (12.3 per cent), Westpac's BT (11.2 per cent) and ANZ (8.4 per cent). AXA is sixth with 5.8 per cent. If the revised offer goes through, it will catapult AMP to the No.1 position in a highly fragmented market.

Within the next 12 months, the expectation is that a vertically integrated model will be the preference, with lower costs, lower fees and bigger distribution systems.

AMP and AXA own two of the biggest financial planning networks in the country. AMP employs more than 2000 financial planners and AXA is not far behind.

With the Cooper review expected to be completed in June, coupled with the fact that AMP was pipped by NAB in its bid for Aviva, it was only a matter of time before it looked around for another partner to bulk itself up to live in a post-Cooper world of lower profit margins.