Tuesday, October 05, 2010

Kuwait Commits US$1 billion to AIA IPO

American International Group Inc received a US$1.0 billion
commitment from Kuwait Investment Authority for the IPO of
its Asian unit, the first major investment inked before the mega
offering's roughly US$15.0 billion launch.
KIA, the country's sovereign wealth fund, is among the major
global institutions that have signed up as cornerstone investors
ahead of AIA Group Ltd's IPO, according to a source on
Monday. The source had direct knowledge of the matter but
was not authorised to speak publicly as the deal has yet to
AIA's IPO is set to start on Tuesday, with shares expected to
start trading on October 29. AIA IPO is likely to be world's
second-largest this year after Agricultural Bank of China Ltd),
which raised US$21.9 billion in Hong Kong and Shanghai in
The planned listing comes after a takeover attempt by British
insurer Prudential Plc collapsed in May over price disagreements.
The key question for AIG is whether the public markets will
give it the US$35.5 billion valuation originally offered by
Prudential. Prudential later dropped the offer to US$30.4
billion just before the bid failed.
"Considering that some of the Chinese insurers are trading
more than 2 times embedded value, I think AIA can get overall
value north of US$30 billion," said Sally Yim, vice president at
Moody's Investors Service in Hong Kong and senior analyst
who covers Asia-Pacific's insurance industry.
Prudential's initial US$35.5 billion bid for AIA was pitched at
1.67 price to embedded value. Embedded value is a measure
commonly used to gauge the value of insurance companies
that includes the present value of future profits from long-term
insurance contracts.
The FT was the first to report KIA's commitment. The paper
also said that the only way KIA agreed to the investment was
because AIG "was forced" to lower its valuation to US$30-$32
billion from US$35-$37 billion.
Research reports have put the valuation range of the offering
from US$29.5 billion to US$38.6 billion, which gives an
embedded value range of 1.1 times EV to 1.7 times.
Ultimately, the valuation is determined by the company and its
underwriters, who gauge the specific embedded value figure
that mutual fund investors are comfortable with.
A valuation that's too high raises the most money but risks an
opening day flop. Too low, and the banks are blamed for not
raising enough.
"AIA is operating in some of the more mature markets like
Singapore and Hong Kong. They have a little bit of a 'China
story', but not as much as the Chinese pure plays," Yim said.

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