Buoyant Feel About Hhg Just As It Starts To List

The Age

Tuesday December 23, 2003

STEPHEN BARTHOLOMEUSZ

The final step in the frenzied and rocky eight-month process of demerging AMP from its British insurance operations will occur today when those operations list on the Australian and London stock exchanges.

Remarkably, given the destabilising revelations and the series of massive capital raisings AMP has made this year, the final complex phase of the demerger, while not completely free of controversy, has been executed smoothly.

Indeed the latest minor controversy, related to HHG plc's successful capital raising at the weekend, is both ironic and, for AMP shareholders, encouraging.

Australian institutions are complaining they either didn't get any of the new HHG shares or were given insufficient quantities of a stock they have been universally sceptical about.

Their complaints are largely price-driven. HHG raised $456 million in London through a weekend book-build, about twice as much as originally envisaged. It did so, however, at what is seen as a ``bargain" price of 30 pence (72 ) a share.

Given that local analysts expected HHG to trade initially at between about 80 and $1 a share, with some seeing underlying value of $1.30 to $1.40 a share, there is resentment that value appears to have been transferred to British institutions at the expense of Australian shareholders.

The strategy pursued by HHG's board and managers at the weekend is obvious and, despite the dilution to existing HHG investors, could enhance their position longer term.

HHG's operations are British-based and its natural shareholder base lies in Britain. By setting the book-build price at levels that stimulated institutional interest - the raising was, despite its increased size, oversubscribed several times - HHG ensured a solid local investor base and unsatisfied local demand. It is in the interests of the AMP shareholders who own most of HHG that a good market develops in Britain for their shares, particularly as British investors, having seen their entire insurance industry undergo similar problems to those that destabilised AMP, could be expected to have a better understanding of HHG's position.

They are better placed to value a business largely in run-off mode.

HHG will be included in the FTSE 250 Index from March, which will encourage British institutions to take up a position and in the process create some support for a stock from which Australian investors are expected to flee in droves.

The more sophisticated Australian shareholders will, however, probably wait until the HHG price settles next year before deciding whether to sell or hold.

Apart from using the increased size of the raising to attract more British investors than had been anticipated, HHG has also made itself stronger and more appealing as a result of expanding the issue.

Originally HHG planed to raise about $240 million and use the proceeds to acquire a majority interest in the best of AMP's British businesses, the big fund manager, Henderson Global Investors, with the rest of the funds being used for working capital.

Now HHG will acquire 76 per cent of Henderson's holding company, HHG Invest, while using the rest of the raising for working capital.

The additional equity in HHG Invest not only gives HHG a bigger share of a good business and its cash flows but, by replacing an illiquid asset with cash, will improve the quality of its regulatory capital in the process.

Henderson is an allowable asset for regulatory purposes only until 2005, at which point HHG would have had to find about $500 million to replace it with more liquid assets. As a result of the raising and the acquisition of the Henderson stake it now needs to find only about $170 million in 2005.

There is a self-reinforcing circularity about the transfer of most of Henderson from supporting policyholders to supporting shareholders that improves both HHG's regulatory capital position and its shareholder and market value.

The size of the issue diluted the proposed 15 per cent AMP shareholding in HHG to about 11 per cent, which will please those who weren't keen on AMP maintaining an exposure to the British businesses.

The success of the raising, which wasn't guaranteed, also means AMP has been released from a stand-by commitment to the convertible loan-note facility that would otherwise have been required to meet HHG's commitments to the British regulator, the Financial Services Authority.

While it could only have been called on in extreme circumstances, the stand-by commitment for nearly $250 million would have represented a continuing exposure to the downside in HHG and a deterrent to strategic activity in AMP's own shares - aspiring predator National Australia Bank has been critical of the continuing links between the companies.

More disconcerting, had the stand-by been called on, under its agreements with the Australian Prudential Regulation Authority, AMP would itself have had to conduct another capital raising next year.

That would have been disastrous - Australian shareholders would revolt if called upon yet again to contribute capital that would be shipped across to British policyholders. That risk, while probably remote, has now disappeared.

The encouraging aspect of the weekend raising is that while the HHG shares may have been sold cheaply their valuation probably means that the sum of the parts of the old AMP will be similar to the original whole.

Those close to the British raising anticipate that HHG shares will list at between 80 and 90 .

With AMP shares trading at $4.94 each yesterday, the combination of AMP and HHG would be worth about $5.74 to $5.84 a share - either just below or just ahead of the $5.77 a share at which AMP shares were trading before the final phase of the demerger process got under way.

HHG shares will be held back by their exclusion from the global MSCI index, with international institutions expected to be sellers of about 40 million shares after HHG lists.

Their inclusion in the ASX 100 and FTSE 250, however, means there will be an underlying pressure on domestic and British institutions to hold or acquire the shares.

HHG will start life as an independent entity with about $3.6 billion of net assets - about $1.43 a share - and minimal external debt. There is longer-term potential for its shares to recover significant apparently forgone value for ``old" AMP shareholders.

bartho@theage.com.au

© 2003 The Age

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