Failed Income acquisition: Allianz shareholders may baulk at taking on social mission: Lawyer

While the deal between Allianz and Income Insurance seems faultless from a monetary perspective, market observers have said that the government is right to focus on Income’s social mission because of its unique history as a co-operative.

They added, however, that they expect that the move to block the deal from going through in its current form is an exception to the growing number of mergers and acquisitions (M&As) in the insurance sector.

In a parliamentary sitting on Monday (Oct 14), the government announced that it was rejecting the German insurer’s bid to acquire a 51 per cent stake in Income, and cited two main reasons.

One was that Allianz’s plan to return capital to shareholders soon after the acquisition seemed to go against Income’s original aim to build up capital; the other was the lack of guarantee that Income would be able to continue to fulfil its social mission.

Allianz, which was to buy the stake in Income for S$2.1 billion, planned to return capital of S$1.85 billion in cash to shareholders over three years after the acquisition.

Breaking down the deal, Allianz would have got back 51 per cent of the S$1.85 billion, which amounts to S$925 million. This means that the German insurer would actually fork out around S$1.2 billion for the 51 per cent stake.

Stefanie Yuen Thio, joint managing partner at TSMP Law, said: “(There’s) nothing wrong with this in the M&A markets. Buyers often price in the excess cash held by targets they acquire.”

But she noted that Income, a former co-operative, is not a normal company.

When it was corporatised in 2022, it was supposed to return S$2 billion in capital surplus under Section 88 of the Co-operative Societies Act. To build up its capital resources and enhance its financial strength, it received an exemption from doing so.

As a result, its reserves would have been indirectly used to partially pay for the acquisition itself, said Kennedys Legal Solutions partner Robson Lee.

“That doesn’t quite fit in with the objective of the entire transaction,” he said, adding that the government’s move to block the deal was “bold-faced”, and appeared to have taken insiders by surprise.

He noted that this is one of very few occasions when the Ministry of Culture, Community and Youth (MCCY) has weighed in on such a deal – largely because of the heritage of Income.

“This is purely a social, community set of considerations overriding the economics and financial aspects of the deal,” he said.

Jean Woo, office managing partner at Ashurst Singapore, said the move to extract capital so soon after the M&A was most likely the main reason behind the government’s rejection.

“It could be possible to be competitive without the need to extract so much cash from Income,” she said.

What now?

Given Income’s unique history, observers do not expect the rejection will affect sentiment surrounding M&As within the Singapore insurance industry.

Billy Teh, an insurance analyst at S&P Global Ratings, said: “As stated in the news, the government’s key concern is on the terms and structure of the transaction, not on the suitability of the acquirer, Allianz...

“Therefore, we see this as an isolated case stemming from Income’s unique position and its social mission.”

Ashurst’s Woo also said the rejection is deal-specific, and still expects M&A activity within the insurance sector to rise on the back of the potential synergies with different institutions.

Woo noted that the government rejected the deal, specifically, “in its current form”.

“Presumably, the deal can go through if the proposed capital reduction for Income is removed or substantially reduced,” she said.

TSMP’s Yuen Thio also said there is no reason why a deal for Income – whether with Allianz or some other party – should not go ahead.

For Income, it would need capital to be sustainable and competitive in the mature market.

For Allianz, Singapore is a relatively wealthy society with an ageing population that requires more insurance safety nets, as well as a good market to base Asian operations for an international player.

“But the terms should be tight enough to ensure that all strategic objectives are met, in this case the social mission, which is very important,” she said.

These terms – such as ensuring that certain affordable categories of insurance will continue to be provided, or giving minority directors super-majority rights in certain decisions – can be explicitly stated in the contract.

“M&A lawyers draft these protections into agreements all the time,” Yuen Thio said.

Lee of Kennedys Legal Solutions noted that it is not clear if there was sufficient support from Income shareholders to approve the deal, even before the government’s objection.

“(Income’s founding members) didn’t want it to change hands because they feel that it dilutes the entire social mission of the entity,” he said.

Furthermore, he said that it is unlikely that Allianz shareholders would agree to a deal to buy Income under the current circumstances.

“What is an entity like Allianz doing, buying over a company and then having to carry its social mission responsibility, which has nothing to do with Allianz shareholders? So they have a diametrically opposed set of interests.”

Source: Business Times © SPH Media Limited. Permission required for reproduction.

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