Standard Life's Joint Venture Sale to Bank of China: Asset Swap or Mountain of Cash?

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 |  Includes: BACHF, SLFPF
by: Daniel M. Harrison

Wednesday, U.K. insurer Standard Life (OTC:SLFPF) said that it is selling part of its stake in its Chinese joint venture Heng An Standard Life to Bank of China (OTCPK:BACHF). Standard Life didn’t go into reasons for its sale, or the amount the joint venture is being sold for.

What’s odd about this is that Standard Life’s financial position is fairly solid. First half of 2009 financial results (called interim results in Britain) showed an increase in core capital and cash generation of around 14% year-on-year, to £167 million ($275 million).

Indeed, it was only in August that chief executive Sir Sandy Crombie was boasting about the firm’s “robust business model” and “resilience of our balance sheet.” Crombie even hinted that China played a core part in Standard Life’s strategy: “We have maintained a strong capital position and this enables us to develop the business by investing in our key growth areas,” he said in a statement.

There are two immediate guesses that it’s fairly safe to make here. The first is that Standard Life unloaded its unit to Bank of China for a very, very large sum of money, or as an exchange for one of Bank of China’s existing businesses (more on that at the end). With Chinese bank shares so vulnerable right now after some recent volatility, Bank of China hardly wants to announce that it’s just blown billions on a new life insurance acquisition.

Standard Life’s initial investment of £50 million has grown around 15 percent on the rise of the Chinese currency alone, so whatever the case, you can bet the British insurer made off with a fair sum of cash or its equivalent.

The second guess is that both Standard Life and Bank of China had equally important reasons for doing this deal that they would rather not let the investing public know right now.

With western life insurance businesses under fire from a recent plan by banks to bundle and securitize life insurance policies for sale to pension funds, it’s not the best business to be in right now. Equally, with lending in China so dramatically reduced in the second half of this year, Chinese banks are understandably on a hunt for more lucrative businesses to maintain growing cashflow.

(Incidentally, I have presented both these hypotheses in previous posts: you can see the one on western life insurers here, and the one on Chinese banks looking out for acquisition targets due to tight monetary policy here.)

My guess is that Standard life wants diversification, and plenty of cash to pay down a potential spike in settlement fees, while Bank of China wants other businesses too so that it can get away from being entirely at the whim of the Chinese government’s monetary policy guidelines.

In that light, with the joint statement that further details are to be announced, it wouldn’t be surprising to see Standard Life take a stake in one Bank of China’s mainland finance or lending subsidiaries.