Manulife Financial Corp.’s biggest deal in a decade ushers in a new era of growth in its homeland and builds on the insurer’s shift toward less volatile business lines.
On Wednesday, Manulife announced a $4-billion deal to buy Standard Life PLC’s Canadian division, which includes investment operations, retirement products, individual and group insurance as well as a large presence in Quebec. The purchase comes at the end of an auction process that began months ago and included expressions of interest from other industry players such as Great-West Lifeco Inc., according to people familiar with the process.
Manulife hasn’t bit off a deal this big since its $15-billion purchase of Boston-based insurer and wealth manager John Hancock in 2004. It’s also the first blockbuster acquisition for Manulife head Donald Guloien, who was named CEO in 2008, just days before Lehman Brothers Holdings Inc. fell into bankruptcy.
The financial crisis that followed challenged Manulife to change product offerings, reform pricing and even cut its dividend to improve its capital position, a move reversed last month with the announcement of a 19-per-cent dividend hike.
The deal for Standard Life is expected to improve Manulife’s ability to increase that payment in future.
The acquisition is poised to strengthen Manulife’s business lines that are less exposed to the ups and downs of the market, analysts say. Manulife said it plans to collaborate more with Standard Life in asset management, highlighting the insurance company’s inclination to build its wealth management businesses.
“The transaction should allow Manulife to increase its earnings contributions from lower volatility, fee based wealth management operations with little impact on its market sensitivities,” John Aiken, an analyst at Barclays Capital, said in a research note.
Investors responded warmly to the $1.6-billion equity financing Manulife brought to the market to help fund the deal. There were orders for twice the amount of subscription receipts on offer, said people familiar with the sale.
Canadian insurers have slowly built up their capital flexibility to make acquisitions, buy back shares or raise their dividends. They are also benefiting from a stable regulatory environment. The Standard Life deal is a “solid strategic fit” for Manulife, according to Kevin Choquette, an analyst at Credit Suisse. Mr. Choquette said he viewed the merger as a positive development with long-term potential.
Standard Life doesn’t break out financials for its Canadian business – the fifth-largest insurer in the country – but the company said the deal was valued at a multiple of 19.5 times this year’s forecast earnings. Manulife shares fell by more than 1 per cent Thursday on the TSX, while Standard Life’s shares climbed by about 8 per cent on the London Stock Exchange.
“It’s a rare opportunity to do a sizable and strategic acquisition – especially one that is financially compelling,” said Steve Roder, Manulife’s chief financial officer.
Manulife is paying “a full price” for the business, according to Moody’s Investors Service, which affirmed its stable outlook on the company. But the rating agency said it viewed the transaction favourable, given the pricing power that comes from increased scale.
“While the transaction is not without integration risk, it will provide a base to expand into the relatively under-penetrated Quebec group market,” said David Beattie, senior vice-president of Moody’s, in a report.
Not everyone expected Manulife’s next big deal would come from the relatively mature North American market. A recent research note from BMO Nesbitt Burns analyst Tom MacKinnon suggested a deal of the same size for an Asian life insurance was more likely. But Mr. Guloien said it’s getting harder to do attractive deals in Asia, and this move was about getting the “best bang for the buck” and seizing the opportunity of a big competitor being put on the block.
“We don’t have a geographic preference. We have no reason to shore up any particular market, whether it’s Canada, the U.S. or Asia,” Mr. Guloien said on a conference call. The potential rate of return, ease of execution and presence in Quebec appealed to the company, he said.
And Manulife may yet make a move in Asia.
“Constraints do not preclude Manulife from pursuing additional deals in our opinion,” Mr. Aiken said. He said Manulife’s leverage and capital ratios wouldn’t necessarily stop Manulife from making other acquisitions, even before the Standard Life transaction closes early next year.
For now, the deal deepens Manulife’s Canadian roots. Standard Life was one of the first life insurers to do business in Canada, with 180 years of history and providing insurance to Canada’s first prime minister, Sir John A. Macdonald. The business is also Standard Life’s largest outside of its home market of Britain.
With files by Boyd Erman