Insurance Australia Group to buy Wesfarmers' Insurance underwriting business

Sydney based, Insurance Australia Group Limited (IAG) has announced the acquisition of Wesfarmers Limited insurance underwriting business for $1.653 billion (A$ 1.85 billion).  Post transaction IAG will become Australia's largest insurer.

Wesfarmers Limited is one of Australia's largest retailers.  Wesfarmers is largest private employer in Australia.  Wesfarmers Insurance is division of Wesfarmers Limited.  The company operates a general insurance underwriting business in the rural, small and medium enterprises and commercial sector.

Insurance Australia Group is a Sydney based multinational insurance giant.  IAG has business operations in Australia and New Zealand and growing presence in Asia.  IAS has business dating back from 1925.  The company is seeking to grow its Australian and Asian operations after selling its UK business last year.

The deal is priced at $1.653  billion.  With this transactional deal Westfarmers will record a pre-tax profit of $670 million.  Moreover company expects to raise $1.072 billion through share sale, to fund the deal.  Post this deal Westfarmers  will have a market share of 27% as compared to current top grosser SunCorp Group Ltd.'s 22%.

Wesfarmers' Insurance return on capital invested was 6.5% over five year period till 2013.  Same was way lower than weighted average cost of capital which was 11.5% for same period.  The deal is a result of this low return venture. 

Sompo Japan Insurance to buy Canopius group

Japanese leading property insurer, Sompo Japan has announced the possible acquisition of Lloyd's of London based insurance and reinsurance group, Canopius.  Deal can be priced at $970 million (100 billion yen) and is expected to be announced with-in a week's time.

Canopius group is Lloyd's of London based privately owned insurance and re-insurance group.  The company underwrites a diversified portfolio of business.  It has gone through series of acquisition following a strategy of organic growth in past nine years.  Canopius operates through Europe, United States, Singapore and Australia.  Company has financial resources more than £500 million.  Canopius has 84% ownership of Bregal Capital LLP.

 Sompo Japan Insurance Inc. is Japanese insurance company and is second largest property insurance company in Japan.  Even Sompo has meaning "property insurance".  Sompo has offices and subsidiaries in 28 countries offering insurance and risk management services.  Sompo Japan is a unit of NKSJ Holdings.  

As of now deal is not finalized.  But as per industry associates, deal can be announced finally with-in a span of week.  Same can be priced at about $970 million.  

In recent years Japanese insurance groups have been trying hard with both organic and green ways to strengthen their base outside Japan.  This is because Japan insurance market is almost stabilized and saturated with ageing population posing challenges towards increasing revenues.   

Avago Technologies to buy LSI Corporation for $6.6 billion

Singapore based Avago Technologies Limited has announced the acquisition of California based LSI Corporation.  The deal value of $6.6 billion ,which Avago is planning to pay in cash.  This is equivalent to $11.15 per share, which is 41% premium to Friday's closing price of LSI Corporation on NASDAQ.

LSI Corporation was founded under name of LSI logic in 1981 as a semiconductor company.  As of now LSI designs and develops semiconductors and software that accelerate the storage in data centre and mobile networks.  

Avago Technologies is leading designer and developer of analog and optoelectronics components and sub-system.  SilverLake bought Avago from KKR and took public with-in three years.  SilverLake sold the holding last year but retained one board seat.  This deal is called SilverLake's best deal ever, generating return of over five times the initial investment.  

Under terms of the deal, Avago will pay $11.15 per share.  Moreover SilverLake will invest $1 billion as convertible notes.  These carries a coupon of 2% and conversion price of $48.04 per share.  This transaction is expected to strengthen and broaden Avago's product base.  Also it is expected to provide economies of scale to the company.  

KKR to buy KKR Financial Holdings for $2.6 billion - all equity transaction

Kohlberg Krevis Roberts (KKR) has announced to acquire its separately listed speciality finance company and credit affiliate KKR Financial Holdings LLC (KFN) for an all equity transaction worth $2.6 billion.  

KFN was launched by KKR in 2004 to invest primarily in corporate loans and bond instruments.  Although it still has a low market cap of $1.9 billion as compared with that of KKR's market cap of $17.7 billion.  Under terms of the deal, KKR will issue 0.51 shares in lieu of each share of KFN.  As per Monday's closing price it values the KFN at $12.79, a premium of 35%.  After this announcement, shares of KFN rose by 31% and that of KKR dipped marginally. 

KKR plans to distribute 100% of investment income it receives as part of KFN business as dividends to KKR shareholders.  As per such involvement, KKR's dividend is expected to be 7% higher.  KFN wa trading at 90% of its book value despite of its high dividend yield of 9.2%.  Moreover, KKR is paying KFN 1.15 times its book value.  

Post transaction, KKR's exposure to private equity will dilute from 68% to 44%.  Moreover as of now KFN's assets are taken care of by KKR's staff only.  Therefore there is very little integration risk available in the deal.  Goldman Sachs is the leading advisor of KKR for this transaction.   

AIG to sell ILFC for $5.4 billion

New York based multinational insurance giant, American International Group (aka AIG) has announced to sell majority stake in its aircraft leasing unit International Lease Finance Corp. (ILFC) to AerCap Holdings, for $5.4 billion.  AIG has been trying to sell stake in ILFC since the global economic meltdown in 2008 when AIG came around near-bankruptcy and government bail out was done.

International Lease Finance Corporation is a leading aircraft lessor based in California and is the largest aircraft lessor in value terms.  It leases Boeing and Airbus aircraft to leading airlines across the globe.  The company was acquired by AIG in 1990 for $1.3 biilion in stock swap.  While AIG was going through the worst fortune of its history it tried to come out of non-core operations i.e. non-insurance operations.  In September 2011, company tried to spun off ILFC through a initial public offering.  But same was not materialized.  Thereafter, company announced the sale of 90% of stake in ILFC to consortium of Chinese companies to repay its government bailout of $182.5 billion.  But same was backed up by August 2013.

Although the deal announced now also faces a lot of regulatory approvals, both US and international, and if cleared it will close in Q2 2014.  ILFC owns a fleet of 989 aircraft.  A sper the terms of the deal, AIG will get $3 billion in cash and 97.6 million shares of AerCap Holdings i.e. 46% of AerCap's stock.  Apart from this AIG has also agreed to provide $1 billion five year unsecured revolving credit facility when the deal closes.

AerCap is the world's largest aircraft leading company in value terms.  It is head-quartered in The Netherlands.  Its fleet comprised of 337 aircraft.  Out of these 250 are owned by company and rest are managed on behalf of third parties.

As per company management, this transaction provides strong foundation for ILFC for continued market leadership and growth.  Company will, after this merger, be more strategically positioned to take on formidable rival GE Capital Aviation Service with fleet size of 1700 aircraft.

In Moday trading shares of AIG rose by 2.2% and AIrCap's stock by 33%.  It seems to be a win-win situation for both companies.   

KKR provides conditional commitment to WMI Holdings Corp.

WMI Holding Corp., fka Washington Mutual Inc, provider of financial services to individuals and small businesses, today announced that KKR & Co. L.P. has entered into a conditional commitment letter to make a strategic investment in the company.

WMI holding Corp. has major business chunk though WM Reinsurance Company, Inc. domiciled in Hawaii.  Apart from this company provides financial services consisting of mortgage banking, consumer banking , commercial banking and consumer finance to individuals and small and mid sized businesses.

KKR & Co. L.P. is a leading global investment firm with $90.2 billion in AUM as of September 30, 2013.  KKR seeks to create value through operational excellence in its portfolio companies.

As per this agreement, KKR has agreed to purchase $10.55 million worth of convertible securities at price per share of $1.10.  Apart from this KKR has also committed to purchase additional subordinated 7.5% PIK notes worth principal amount $150 million.  Apart from this KKR would have the right to partcipate upto 50% of equity offering capped at $1 billion.  KKR will provide deep opportunity to WMI with its deep experience across different asset classes.

Blackstone Advisory Partners L.P. are the advisor for the company for this transaction and strategic investment.  

Texas community bank closed : 24th in the year List, is it towards end of community banks ?

Woodlands based Texas Community bank NA was closed and taken over by Federal Deposit Insurance Corporation (FDIC).  Out of $160.1 million of bank's asset, $147.9 million of assets have been purchased by Spirit of Texas Bank.

On Friday December 13, 2013 Texas Community bank NA was closed by Office of the Comptroller of the Currency and same has been handed over to FDIC.  No prior notice was given to any of bank's customer.  Although FDIC issued a notice reassuring all customers of bank regarding the safety of their assets.  All deposit accounts are immediately transferred to College Station based Spirit of Texas Bank SSB.  All the branches of  Texas Community bank will reopen as branch of Spirit of Texas Bank, which has 8 locations in Houston area. 

As of September 30, 2013 Texas Community bank had $160.1 million in total assets and $142.6 million in total deposits.  Spirit of Texas Bank has agreed to purchase $147.9 million of failed assets of former bank.  The rest will be taken over by FDIC.  Although it is not a major set-back for FDIC, as it have only $10-11 million impact on deposit insurance fund.  

But the small impact is not the end of the story.  This is 24th bank in this year to be taken over by FDIC.  Apart from community banks there are many small financial institutions that are struggling to operate.  So now the future lies in big institutions. Can we see more consolidation in near future ?