Great Eastern Holding

[weijian]

hi gzbkel,

OCBC has stated their motivation for the VGO when it was announced on 10th May 2024 and I re-produce it again below in italics (bold emphasis mine):

The Offer is expected to be earnings accretive to the Offeror. GEH provides diversification to the Offeror’s earnings base to deliver balanced earnings growth through economic cycles. The GEH Group has contributed an average of about SGD700 million annually in net profit to the Offeror over the past ten years, which translates to an average of about 15 per cent. of the Offeror’s yearly net profit over this period.

The Offer presents an opportunity for the Offeror to deploy its capital to generate greater returns for its shareholders. By increasing its investment in GEH, the Offeror can further capture the benefits from ongoing synergies and have a greater share of GEH’s value.

--------------------------------

So OCBC's motivation is pure economics - They want to acquire as much as possible, shares that are accretive to their own earnings. As such, we could reasonably conclude the below:

1. GEH's listing status or free float is not part of their consideration.
2. GEH placing out new shares to 3rd parties to restore free float go against their motivation (since it dilutes OCBC's share of EPS).
3. OCBC placing out acquired shares to 3rd parties to restore free float go against their motivation (since acquired shares are accretive to OCBC's own earnings).

Based on OCBC's FY23 results, its interest income margin is ~5% and if we assume it is excess capital that OCBC is using (where interest expense is zero), then I guess OCBC cannot pay GEH minorities beyond P/E~20 to maintain "accretive earnings" to themselves.

CEO Helen Wong is paid by OCBC, not GEH or GEH OPMIs (just like FF Wong gets his remuneration and most of his wealth with BSL, not BP), so it is understandable that her top priority is to maximize OCBC's interests.

Is the insurance business a sufficient countercyclical effect against lending margins? In the prior 2 years, rising rates + inverted yield curve gave huge tailwinds to NIM but a big headwind to insurance's long term asset valuations and single premium plan business.

Will the near future facilitate a wind change for GEH and allow a win-win for everyone?

Future offer for Great Eastern, if any, will be made in interest of OCBC: CEO Helen Wong


IF OCBC were to make any future offers for the shares in Great Eastern Holdings (GEH) it does not own, it will be in the interest of OCBC and its shareholders, and not GEH’s minority shareholders, said the lender’s group chief executive Helen Wong.

https://www.businesstimes.com.sg/compani...helen-wong

[weijian]

Reallocation of capital geographically for its insurance business? Maybe OCBC is reloading its gun to finish off its GEH's kill.

OCBC BANK (HONG KONG) LIMITED’S SALE OF THE ENTIRE 33.33% STAKE IN HONG KONG LIFE INSURANCE LIMITED

The net asset value of the entire Hong Kong Life was HK$1,024 million as at 31 December 2023 (approximately S$180 million). The consideration for the Sale Shares is HK$589.3 million (approximately S$103 million), payable upon completion and will be satisfied wholly in cash. The consideration was arrived at following arm’s length negotiations on a willing-buyer, willing-seller basis, taking into account, among others, factors such as the net asset value and the embedded
value.

https://links.sgx.com/FileOpen/OCBC-Sale...eID=829086

[hh488]

OCBC do not need to resort to sell its other assets to finish off the acquisition of GEH.

I believe the bank has more than enough bullets to buy off its remaining shares it doesn't own.  Well, I could be wrong too.

[weijian]

hi hh488,

It was a "tongue-in-cheek" post as revealed by the emoticon at the end of the message.

OCBC definitely has more than enough bullets to privatise GEH, as evidenced by its bullets been used on dividends and SBB. But who doesn't want a bargain on their purchase? Since OCBC firmly controls GEH and consolidates all its financials with its 89% stake (pre offer), the motivation to "purchase more GEH" is to increase their own EPS as publicly stated.

To increase EPS, the (excess) capital used to acquire GEH must generate higher returns than other usages like SBB or expanding their ASEAN presence. If OCBC is too expensive for SBB (eg. buying one's own stock at P/E=20 is equivalent to making an acquisition that generates 100/20=5% returns in the coming year with everything else unchanged) OR there are no banks attractively priced in the ASEAN region to acquire, then it really make sense for OCBC to increase their share of GEH's earnings. But the price it pays will be capped by its alternative usages like SBB and regional expansion as described.

On another note, coming out of Allianz's withdrawal of its controlling acquisition of Income Spore, it is quite evident than there isn't much of a premium for Spore insurers after all. Allianz's offer for Income Spore was ~1x embedded value - I had thought that it was the market price to pay for gaining control but after what has since transpired, it is clear that Allianz offered a 1x embedded price because it was going to get "reimbursed in future" when Income does a capital reduction. And now back to OCBC's offer for GEH, OPMIs can't be too optimistic even though GEH is obviously bigger in scale than Income, wrt to how much OCBC will offer based on multiples to embedded value.