Manulife: Scared or Hungry?

By Andrew Willis

Smart people at Manulife Financial (MFC) are either very worried about something they see on the horizon, or very excited about an acquisition opportunity.

Or maybe they’re a bit of both.

Those two options would explain why Manulife, a $40 stock as recently as the summer of 2008, is now pumping out $2.5 billion worth of shares at $19 each, and selling that equity at a substantial 6% discount to where it closed on Wednesday.

Newly named Manulife chief executive officer Donald Guloien is explaining this share sale with the same conservative logic used to justify $2.275 billion of stock sales last December.

Mr. Guloien, who spent his career at the insurer before taking the helm last year in the midst of the market meltdown, said in a press release: “We believe this transaction achieves the fortress level of capital necessary to buffer against more conservative economic scenarios.”

But Manulife’s CEO also held out the potential for using this stock sale to fund growth, saying the financing will “position us to take advantage of highly attractive acquisition and growth opportunities."

Everyone knows that Manulife is itching to buy AIG (AIG) units in Asia that are on the auction block, but is constrained by balance sheet issues. And the seller - U.S. taxpayers - wants cash for those AIG divisions.

In coming months, we will probably find that Manulife wants to play defence and offence with all this money.

The company will do acquisitions, but they will not likely be of the transformational scale seen when it bought U.S. insurer John Hancock for $11-billion (U.S.) back in 2003.

And the insurer now does have the capital needed to meet the promises it has made to clients. Mr. Guloien attempted to shore up a balance sheet that is weighed down by exposure to the drop in equity markets. Manulife sold its clients billions of dollars worth of guaranteed savings products that were invested in stocks, and these annuities and other funds now represent an enormous potential liability for the company.

The underwriters have an option of increasing the size of this financing to $2.875 billion (Canadian) if there is investor demand for the stock. Scotia Capital and RBC Dominion Securities are leading the transaction. The dealers are likely to use that option, given the healthy discount on this bought deal, and Manulife’s attractive position as a leading global player in insurance.

Once this deal is done, Manulife will retire $1 billion that remains outstanding on a credit facility that was struck last year with Canadian banks during the market’s worst days. In a press release, Manulife chief financial officer Michael Bell said: "While the common equity issue is expected to be dilutive to the company’s earnings per share and return on equity, the company believes that strengthening its capital position is in the best long term interests of the company and its shareholders.”

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