AIG's Deal to Sell Alico to MetLife Could Be a Win-Win-Win

Matthew Scott

MetLife (MET) announced an agreement on Monday to acquire one of American International Group's (AIG) international life insurance subsidiaries for $15.5 billion. The deal allows MetLife, the nation's largest life insurer, to expand its business into Japan, Europe and the Middle East, while helping government-controlled AIG pay back a portion of the $130 billion in bailout assistance it received from the U.S. Treasury and the Federal Reserve.

Under the terms of the deal, AIG will sell its American Life Insurance Company (Alico) unit for $6.8 billion in cash and $8.7 billion in stock and equity securities, giving AIG an ownership stake in MetLife. MetLife will raise additional cash to finance the deal through a combination of issuances of senior debt and common stock.

Alico operates in more than 54 countries, but about 70% of its income comes from Japan. The transaction has been approved by the boards of directors of both companies and is expected to close by the end of 2010.

"With this acquisition, MetLife is delivering on its strategy to accelerate international expansion as a powerful growth engine for the company," said C. Robert Henrikson, chairman, president and chief executive officer of MetLife, in a statement. "Today's transaction will bring together two profitable, complementary, well-established businesses with superb track records and strong long-term growth potential."

Analysts Approve of Metlife's Purchase

The deal is AIG's second major sale of a subsidiary in a week. "With this sale of Alico, along with the sale of AIA to Prudential PLC announced last week, we are on track to generate approximately $50.7 billion from these two transactions alone, consisting of approximately $31.5 billion in cash to repay the [Federal Reserve Bank of New York], plus another approximately $19.2 billion in securities that we will sell over time to repay the government," said AIG Chairman Harvey Golub in a statement. "Both sales give AIG greater flexibility to move forward with our restructuring and rebuilding efforts."

AIG is expected to use its shares of MetLife at an appropriate time to raise even more money to repay its debts. MetLife expects the acquisition to improve its stock price, increasing its 2011 operating earnings per share by approximately 45 cents to 55 cents per share, and enable the company to increase its estimated 2011 year-end operating return on equity by 140 to 160 basis points.

When rumors of the deal first surfaced, Keefe, Bruyette & Woods analyst Jeffrey Shuman upped his price target for MetLife from $41 to $44, and FBR Capital also upgraded MetLife, writing in a note: "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. We view the risk/reward on MET as too good to pass up, despite the uncertainties and complexities of a potential ALICO deal."

Investors seemed to like the deal, sending MetLife shares to $40.50, up $1.57 or 3.9% in morning trading. AIG shares also rose to $29.58, up $1.50, or 5.3%

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