MetLife (NYSE:MET) recently announced an agreement to acquire AIG's ALICO operation for 15.5 billion. The market's response was enthusiastic, pushing shares of both companies up. MET closed at 40.90, up 5% on the day.
The agreed price is fair, integration issues are minimal, and the acquisition makes good strategic sense. After reviewing the press release and presentation, my long term opinion on MET's potential is more favorable than it was, based on the strategic fit.
Here is a snip from the presentation (click to enlarge images):
Viewed either from the P/B or P/E perspective, the purchase price is consistent with industry multiples and with my valuations for MET, which rely on a P/B of 1.2 or a P/E of 12.
According to the presentation, there is very little overlap between the two companies, and cost cutting is expected to produce 75 million annual savings. Integration expenses are projected at 300 million, to be incurred over two years from closing. The lack of overlap greatly reduces the risk of surgical mishap in joining the two companies.
The size, a 15.5 billion acquisition by a company with a market cap of 33.5 billion, is larger than the 25% I would prefer to see. However, given the lack of overlap and the fair price, paid in large part by shares, the size of the deal is not a serious drawback: in point of fact, it may be an asset because the combined entity will be a major player, holding #1 positions in many large markets.
MET has been looking to expand its presence in Asia and emerging markets. By acquiring ALICO, MET is able to be in business where they want to be with additional earnings potential of .50 per share. If they tried to enter the markets involved from scratch, they would have to operate at a loss until they could get the operations up to scale.
According to the presentation, the acquisition as planned de-leverages the company and makes it less exposed to fluctuations in the equity markets. That would reduce issues that have been of considerable concern in the marketplace.
Here is another snip, on the consideration to be paid:
Working with this info, I see year end 2010 GAAP book value for the combined entity of 38.31; at a multiple of 1.2 that would suggest a target of 45. On EPS, I get 4.58 per share, at a P/E of 12 that would give a target of 55. The figures bracket my previous target of 50 and reflect ALICO's strong ROE.
The acquisition is expected to close during 2010, and clarity on valuation will not arrive until the transaction and integration have been completed. If successful, the transaction will create a truly world class insurer that may fetch premium valuations. The presentation covers this ground effectively.
I have been playing MET by means of diagonal spreads, currently long the Jan11 30 calls and short the Jun10 41 calls. MET has a beta of 1.90 and the use of calls as a substitute for share ownership provides a defined lower limit to the risk of a decline. Volatility has been sufficient to support good premiums for the out of the money calls sold and the position is developing favorably.
I shorted enough MET to make the position delta neutral until I had a chance to complete this review. I have since removed the hedge and plan to hold my existing options position through the June expiration. At the current price, and with a fairly long wait for clarity on the completion and success of the acquisition, I don't intend to enlarge the position. This situation is worth tracking for a year or so to see how it develops: if the world class scenario comes into better focus without too much price appreciation it will be a money maker.
Disclosure: Author holds a long position in MET, as described