Just How Risky Is MetLife's Bid for AIG's ALICO Unit?
MetLife's operating earnings provided the lift analysts keyed in on, as they rose from 17 cents to 96 cents for the quarter. But the possibility of a credit downgrade led investors to take profits first and ask questions later.
"A Material Adverse Impact"?
"We placed our ratings on MetLife on CreditWatch negative because of the sheer size of ALICO and to reflect our view that the potential acquisition could have a material adverse impact on MetLife's financial metrics, such as capitalization and fixed-charge coverage, as well integration risks," said Standard & Poor's credit analyst Shellie Stoddard.
MetLife's "capitalization and financial flexibility are below expectations for the rating," she added.
S&P and other analysts have a number of additional concerns about the deal. MetLife will have to raise capital to pay for ALICO, and AIG will likely want all cash. So that means raising the estimated $14 billion to $16 billion purchase price, plus additional billions to make sure that it maintains its regulatory capitalization requirements. Generating those funds through a massive debt offering in this fragile economy is risky and will likely dilute the value of shares.
Another issue is valuing ALICO and the assets it holds. "There are questions about whether ALICO is actually worth the estimated $14 billion to $16 billion asking price, particularly at a time when it is losing creditability and market share within its Japanese market," says George Van Horn, senior analyst for IBISWorld Research. Similarly, it may be difficult to determine if ALICO has assets that include debt instruments that could suddenly lose value if the market turns.
Or an Attractive Asset?
ALICO operates in over 54 countries, but about 70% of its income comes from Japan. The cost of building its business in the other 53 countries could make the asking price too steep to pay in a slow-growth global economy.
Still, ALICO is an attractive asset for an insurance giant like MetLife. In a note from Keefe, Bruyette & Woods on Wednesday, analyst Jeffrey Shuman wrote: "Better fundamentals and the possibility of an accretive transaction support increases to our estimates and price target." KBW upped its price target from $41 to $44.
FBR Capital also upgraded MetLife on Friday, partly motivated by the ALICO acquisition. "Given MET's franchise strength, market-share gains in 2009, and moderating credit exposures, we struggle to see material downside from current levels, barring a double-dip recession," the company wrote. "We view the risk/reward on MET as too good to pass up, despite the uncertainties and complexities of a potential ALICO deal."
More Details Needed
Most analysts expect MetLife to do a deal of some kind, even if it doesn't purchase ALICO, so the upgrades may be banking on the company increasing in size and market share in 2010, no matter what. So far, Moody's and Fitch Ratings haven't supported S&P's cautiousness on the deal, so S&P's concerns may be overstated.
IBIS's Van Horn says MetLife's ability to competently manage risk is helping the company avoid a more pessimistic view. But because of the ALICO deal's size and scope, until more details are known, the uncertainty will continue to be a weight on the stock.