Income Shareholders Exit with a 4 times return after 20 years: will this encourage Great Eastern shareholders to hold out

Allianz plans to acquire 51% of Income Insurance at $40.58 per share, with a deal size amounting to $2.2 billion and valuing the company at nearly $4.4 billion. Here we look at the Income Insurance acquisition by Allianz, the underlying valuation, and whether this would inspire the remaining shareholders of Great Eastern to hold out for a better deal.

NTUC is selling out of Income Insurance

NTUC Enterprise owns about 72.8% of Income Insurance, with the remaining shares held mainly by retail investors. Many of these retail investors acquired their shares over 20 years ago at a par value of $10 per share and have held onto them due to the difficulty of selling.

Allianz’s target is to acquire 51% of shares and will seek to acquire as many shares from retail investors as possible. NTUC Enterprise has provided an undertaking to sell enough shares to allow Allianz to reach the 51% ownership.

This means that should all retail investors sell to Allianz, NTUC Enterprise will only have to sell 23.8% of its shares, retaining 49% ownership.

On the other hand, if no retail investors sell to Allianz, NTUC Enterprise will have to sell 51% of its shares, and will be left with 21.8% of shares.

This means that based on the range of percentage of shares sold, NTUC Enterprise may be left with significant influence and continue to have the power to participate in financial and operating policy decisions, but not tantamount to control. However, other factors, such as the number of board seats, may shift the balance of control.

Is the Income Insurance deal fair?

The net asset value of Income Insurance at December 2023 was $29.55, making the offer price a premium of 37% over the NAV. A recent report also estimates Income Insurance’s embedded value at $4.357 billion, roughly the same price at which Allianz is valuing Income Insurance.

In comparison, Great Eastern’s NAV is $16.66, and hence the offer of $25.60 is a premium of 54% over the NAV. However, Great Eastern themselves estimated their embedded value per share at $36.59, which means the offer is 30% below the embedded value.

The embedded value is calculated by adding the present value of future profits from in-force insurance policies into the NAV. It is generally still considered as a conservative estimate because it does not factor in the value of any potential new business.

Why does Allianz want to acquire Income?

Allianz wants to expand its offerings in Singapore’s insurance and wealth management markets, and will bring to the table capabilities from its global insurance. Allianz has also said that it has no intention to introduce any major changes to the business, re-deploy fixed assets or discontinue the employment of any existing employees.

Allianz plans to integrate its Allianz Singapore business into Income Insurance and retain Income Insurance as the surviving entity after.

Allianz will also carry out a strategic and operational review to enhance value and efficiency and targets to achieve a double-digit return on its investment in the medium term.

When will the deal be finalised?

The deal will be finalised at the fulfilment of the conditions in the pre-conditional offer. The conditions include authorisations and clearances from all relevant regulators or bodies, such as the MAS, to proceed with the deal. This should be no later than the long-stop date, which is 9 months from the pre conditional offer date of 17 July 2024.

Should you sell?

Income Insurance is not listed and hence it is illiquid. There were platforms available to trade the shares but with difficulty, limitation to access and at much lower prices. While there is every possibility that Allianz could turn Income Insurance into a behemoth and even exit at a substantial profit, it is not meaningful to consider these possibilities at this juncture.

Is the Great Eastern deal fair?

The independent financial advisor (IFA) had already deemed the deal not fair but reasonable. This assessment was made because the offer price was a discount to the embedded value and also below the IFA’s’s derive range of values. Comparable transactions also put the P/B value at about 1.8 times.

Now with Allianz making an offer for Income Insurance, it further indicates that the Great Eastern offer price was inadequate.

The IFA only said the deal was reasonable because of low historical trading price, the lack of liquidity given OCBC’s substantial shareholding, and the risk of trading suspension.

Great Eastern’s current situation

Before the offer, OCBC owned 88.67% shares, meaning that OCBC needs to get 75% of the remaining 11.33% shares or 8.50% of the total shares. As of 12 July 2024, OCBC had acquired 4.85% shares, or 43% of remaining shares, with a 3.65% shortfall of shares.

Therefore, OCBC now owns 93.52% shares, and as the public float fell below 10%, trading was suspended.

Great Eastern will only be able to delist if a subsequent general offer that meets the criteria is received or if Great Eastern enters into a subsequent scheme of arrangement that complies with the listing rules.

The general offer must fulfil two criteria.
1) OCBC as the offeror needs to get 75% of the remaining shares it did not already own before the launch of the offer.

2) The offer must be deemed “fair and reasonable” by the IFA. Because it was deemed not fair, SGX will also not waive the 75% acceptance condition and Great Eastern will remain listed.

Next steps for Great Eastern

However, if OCBC can obtain between 75% to 90% of the remaining shares, SGX may direct Great Eastern to make an exit offer. Shareholders can still choose not to accept the offer and remain as shareholders of the unlisted company.

A scheme of arrangement also requires at least 75% in value of shares to vote in favour of the delisting. A court sanction and SGX clearance is required to proceed with a scheme of arrangement and OCBC must abstain from voting. OCBC would not take this step as it would likely not end in their favour.

Lastly, OCBC can increase the offer price such that the IFA will opine that the exit offer is fair and reasonable. SGX may then waive the requisite conditions and allow a delisting. However, pursuant to the Singapore Code on Takeovers and Mergers, OCBC cannot make an offer that is better than the first within a period of six months.

OCBC has also said that it does not intend to increase the offer price. Therefore, Great Eastern will likely be asked to restore its free float and shareholders who did not accept the offer will remain as shareholders.

Of course, if OCBC is able to obtain 90% of the remaining shares, it will be a done deal for OCBC.

Closing statements

Income Insurance was an unlisted company from the beginning, and investors have now hit pay dirt with a decent offer that is 4x the price many investors paid and held for more than two decades.

Great Eastern is a stock where investors face the potential of delisting, affecting liquidity. At the end of the day, depending on the investor’s investment horizon, perhaps holding shares in an unlisted insurer might not be too bad. OCBC as substantial shareholder will continue to govern the company well and ensure Great Eastern brings value to its shareholders. OCBC will likely also continue to extract excess cash as dividends. In this regard, for investors with the right time horizon and stomach for illiquidity, Great Eastern could be the next 4x unlisted play after a 20 years holding period.

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