With MetLife (NYSE: MET) reportedly out of the race to buy ING’s (NYSE: ING) Latin American pension and insurance assets due to its weak stock price, the Dutch group now faces two choices – either selling to Principal (NYSE: PFG) or carrying out an IPO – Atlantic Equities analyst Alan Devlin told BNamericas.
The assets for sale are ING’s retirement operations in Chile, Mexico, Peru, Uruguay and Columbia; combined, they are the second largest mandatory pension provider in Latin America. ING is reportedly selling the assets for US$3bn.
“Strategically, it would be a very attractive transaction for Principal, increasing both its retirement assets and its international assets significantly, making it one of the leading global retirement players,” Devlin said.
Principal already has sizeable retirement operations in Mexico and Chile, so it would have the potential for significant cost synergies to help fund the deal. It would more than double the size of its international operations, increasing their earnings from 17% of the total to 35%, based on 2012 estimates, the analyst wrote in a note to investors.
CASH POSITION
On a conference call in May, Principal said it has US$1.9bn of total excess capital, of which US$1.1bn was at the holding company. The company also generates US$500mn a year of free capital post dividends, and had planned to deploy only US$700m in 2011 – of which $500m is already deployed – and keep the rest as a cushion.
Devlin said he believes Principal will generate an additional US$500mn in 2012 and, therefore, has the potential to use up to US$1bn of its own capital in any transaction.
“Its debt to total capital leverage is also only 15%, compared to MetLife’s 25%, and if it raised its debt to total capital to 25%, it would have an additional US$1.2bn of debt leverage. The remaining acquisition price would have to be raised as fresh equity,” the analyst said.
“We estimate that the assets for sale made US$260mn in earnings in 2010, equivalent to a multiple of 11.5x. ING’s Latin American assets made US$280mn in 2010, but we estimate that one-third of these earnings are from its joint venture in Brazil, which we believe is not for sale,” Devlin wrote in a note to investors.
ING holds a 36% stake in Brazil’s leading non-bank controlled insurer, SulAmйrica, via direct and indirect holdings.
ING DEAL WOULD NOT BE EXPENSIVE
Even considering Principal’s 8.3x and MetLife’s 6.9x multiples, the ING deal is not expensive for an emerging market or Latin American retirement operation, according to Devlin.
“Furthermore, given the overlap in ING’s largest operations, specifically Chile and Mexico, we believe there could be US$30mn of after-tax annual cost savings, which would reduce the multiple to 10.3x operating earnings including expense synergies,” he said.
In March, ING announced it was reviewing “strategic options” for its insurance and pension operations in Latin America, including a possible sale, to repay state aid money received at the height of the 2008 credit crisis.
In November 2010, ING announced that the base-case scenario for this divestment is two IPOs – one Europe-led IPO combined with strong possibilities in emerging markets and one US-focused IPO with a leading franchise in retirement services – but it was still undecided if its Latin American units were to be included in the transactions.
“ING could still carry out an IPO, but given this highly volatile market, I think they would be better off selling it to a trade buyer,” Devlin said.
