Ping An Insurance Company yesterday confirmed that it has terminated a $3.3 billion agreement to purchase 50% of Fortis Group's global asset management business, Fortis Investments. In a press release, the Chinese insurance company said the decision was a mutual agreement made "given current turbulent market circumstances". This is the first major deal in Asia to be directly scuppered by the financial sector fallout caused by the credit crunch.
The cancellation of the deal, which was agreed in March, comes after a partial nationalisation of Fortis earlier this week when the governments of Belgium, the Netherlands and Luxembourg stepped in to support the bank. Together they injected a total of €11.2 billion ($15.4 billion) in exchange for 49% of the bank. Fortis has also agreed to sell part of the operations that it bought from ABN Amro for €24 billion in October 2007. The sale will not include the asset management arm, which has already been integrated into Fortis Investments.
Fortis Group made an announcement on Tuesday, saying it expected it would "not to be able to complete the asset management partnership with Ping An", but with the Hong Kong stock exchange shut on Wednesday and trading in Ping An suspended yesterday morning, there was some delay for the market to react. In the afternoon session, Ping An's share price rose by almost 14%. When the mainland markets reopen on Monday, similar gains are expected in Ping An's A-shares.
Investors will have been relieved that Ping An does not need to put the $3.1 billion that had been allocated for the deal into a troubled European financial institution. It also means that there is no need for Ping An go ahead with a placement of new shares to raise capital to help finance the deal.
"We believe if the deal were pulled it is not necessarily bad news for Ping An given the overwhelming negative sentiment associated with Fortis Group recently," says a J.P. Morgan report published yesterday. It goes on to say that although the failure of the deal will be a setback to the insurer establishing itself as a financial conglomerate, it expects the management will be keeping an eye out for further opportunities to get a stake in banking and asset management businesses outside of China.
J.P. Morgan was the adviser to Ping An on the Fortis Investments acquisition as well as on an earlier investment by Ping An into Fortis Group. It currently has an "overweight" recommendation on the Chinese insurer.
Although Ping An no longer has to buy a big chunk of Fortis's asset management arm, there are still concerns related to the portion of the overall group that it already owns. Ping An is one of the biggest shareholders in Fortis Group, with a 4.99% stake. The initial 4.18% was bought in November last year in the open market at an average price of €19.05 per share, or a total of €1.8 billion. Since then, Fortis's share price has fallen to €5.80, resulting in an enormous loss of approximately $1.7 billion for Ping An in less than a year.
When Ping An announced its acquisition of 50% in Fortis Investments it was buying into a company with €245 billion of assets under management. The deal was to help Ping An develop its asset management business in the domestic market, part of a three-fold strategy which involves focusing on three sectors: insurance, banking and asset management. For Fortis there were the benefits associated with the access it would get to both China and Asia. It would also be able to use the Ping An name to distribute to its clients. More immediately, it was getting a much needed shot of capital.