Wednesday, April 04, 2007

Scotia Capital Says Manulife Building "Acquisition War Chest"

The Globe and Mail, Andrew Willis, 4 April 2007

Everyone who knows Dominic D'Alessandro believes the 60-year-old Manulife CEO will pull the trigger on one more big deal before he calls it a career.

Yesterday, there were new signs that Manulife is getting close to launching that monster transaction, as Scotia Capital analyst Tom MacKinnon pointed out that the country's biggest insurer is stockpiling ammo.

Back in 2004, Mr. D'Alessandro staged one of the most successful acquisitions that Canada has seen, with a $15-billion cash-and-shares bid for Boston-based John Hancock that signalled a once-sleepy company owned by its policy holders could be a North American leader. The Manulife team delivered cost savings and profit growth from the John Hancock purchase, and the balance sheet can now support another deal of similar scale. That's given Mr. D'Alessandro a battle-proven takeover team, and investors the faith to back a bold expansion play.

The signal that action is imminent comes from the fact that Manulife, and the other large Canadian insurers, have scaled back their share buyback plans in recent months. In two cases, we know where the money is going: Sun Life Financial needs $720-million to buy a U.S. group life insurance unit from Genworth, and Great-West Lifeco is shelling out $4.6-billion for mutual fund manager Putnam Investment Trust.

But Manulife doesn't have a clear reason to slow its buybacks and build cash reserves. Scotia's Mr. MacKinnon, a former actuary, calculates that Manulife's excess capital now stands at $4-billion and will be $6-billion by the end of 2008. In addition, the analyst says Manulife could shoulder another $2-billion in debt. The issue, then, is what to buy, and when to make an offer.

The universal expectation is Manulife will target another U.S. insurance company with a focus on wealthy individuals, to complement John Hancock. Mr. MacKinnon throws out two potential targets, Principal Financial Group, which has a $16.2-billion (U.S.) market capitalization, and Ameriprise Financial, worth $13.8-billion. The analyst noted that with insurers commanding premium prices, a takeover would not add much to the bottom line in the short term, "so this may not be the most opportune time to buy."

A contrarian view expressed by several financiers is that Mr. D'Alessandro never discusses potential European expansion, which may be an attempt to throw off rivals and disguise an interest in the likes of Prudential PLC, a large British player. (If no attractive acquisition appears, watch for the insurer to opt for shareholder-friendly capital reduction in the form of dividend increases or renewed buybacks.)

When it comes to timing, common sense dictates that the time to move on a rival is after a market correction, perhaps on continued fallout from the U.S. subprime mortgage problems. Manulife executives have confidence and power on their side. With a sharp selloff in insurance company stocks, the battle may be joined.
Financial Post, David Pett, 3 April 2007

Cash is building up fast over at Manulife Financial Corp. and according to Scotia Capital analyst Tom MacKinnon, its a sure sign Canada's largest insurer is preparing for a major purchase sometime soon.

"We have to believe that Manulife is building an acquisition war chest," Mr. MacKinnon says in a note to clients. "In this low rate environment, excess capital doesn't yield anything near the targeted ROEs, so obviously effective deployment is the key to creating shareholder value."

Over the last six to nine months, he says the amount of share buybacks for Manulife has diminished in value from 30 - 40% of annual EPS to just 5% EPS. If that continues, the company's excess capital, already estimated to be around $4 billion, could grow to as much as $6 billion by next year.

With no significant increases to payout ratios anticipated, Mr. MacKinnon believes the cash is destined for an acquisition that focuses on building the company's U.S. asset management business and its 401(k) business.

He says Principal Financial Group and Ameriprise Financial are two companies that fit the criteria and are of similar size to the $15-billion John Hancock acquisition. A play for MetLife Inc. and/or Prudential Financial Inc., each of which probably carries a price tag of $50 billion, isn't likely, he says.

UK-based Standard Life is a low probability possibility, he adds, but one that offers a significant foothold into the U.K. and European markets.

He reiterated his 'sector perform' rating and $43 price target for the stock.
Bloomberg, Sean B. Pasternak, 3 April 2007

Manulife Financial Corp., Canada's largest insurer, may accumulate as much as C$6 billion ($5.19 billion) in cash by the end of next year that could be used for acquisitions in the U.S., Scotia Capital analyst Tom MacKinnon said.

Manulife currently has about C$3.9 billion in so-called excess capital, the analyst said in a note to investors. That may increase if the Toronto-based insurer continues to reduce its share buybacks, as it's done over the past nine months.

``We can only postulate that the company is building a significant war chest,'' MacKinnon wrote in the note.

Manulife may be looking at asset-management acquisitions in the U.S. such as Des Moines, Iowa-based Principal Financial Group Inc. or Minneapolis-based Ameriprise Financial Inc., the analyst said. Manulife spokesman Peter Fuchs declined to comment.

Principal has a market value of $16.2 billion, while Ameriprise is worth $14 billion. Principal spokeswoman Susan Houser didn't return a call seeking comment and Ameriprise spokesman Paul Johnson declined to comment.

Chief Executive Officer Dominic D'Alessandro, 60, has said that Manulife could expand in the U.S. following its $13.9 billion purchase of Boston-based John Hancock Financial Services Inc. in 2004. The insurer has cut back by half its share buybacks in the last nine months, MacKinnon said.

``These targets seem to meet some of the criteria they're looking at,'' MacKinnon, who owns Manulife shares and rates the stock a ``sector perform'', said today in a telephone interview.
Scotia Capital, 3 April 2007

- Share buy back activity for the Canadian lifecos (MFC and SLF in particular) has declined significantly over the last 6-9 months, and while SLF is preparing to close its $720 million all cash acquisition of Genworth's U.S. group business, we have to believe that MFC is building an acquisition war chest. MFC's excess capital, currently estimated to be $4 billion, could grow to nearly $6 billion by the end of 2008.

- Coveted targets with U.S. 401(k) and U.S. asset management business (like Principal Financial Group and Ameriprise) are expensive. Even after deploying $6 billion in excess capital and $2 billion in debt we get minimal accretion ($0.03-$0.04 per share) for MFC. So this may not be the most opportune time to buy.

- Not to be overlooked is the fact that CEO D'Alessandro's employment agreement with MFC terminates at the end of 2008. While it can be modified, it raises the question as to how long he'll remain at the helm.