In a 1 November letter to AMP’s board of directors, Merlon Capital’s Hamish Carlisle and Neil Margolis expressed their frustration with AMP’s decision to explain itself through the media, rather than with the fund manager directly.
“Thank you for facilitating Mike Wilkins response to our letter dated 27 October 2018; the release of additional information in relation to the AMP portfolio review; and, having David Murray outline the board’s position in relation to some of the issues raised on the ABC’s The Business program,” the letter reads.
We are disappointed the board chose not to engage with us in relation to our requests or even acknowledge that it was in the process of reviewing our letter until after it was publicised in the media,” he said.
Attached to the letter is Merlon’s assessment of the “value destruction” and various valuation multiples contained in the fund manager’s previous correspondence in light of additional AMP disclosures provided to the market.
Merlon said the impact of the additional information is “inconsequential” within the context of the sums involved. The fund manager maintains that the sale of AMP’s businesses to Resolution Wealth represents approximately 0.6-times the embedded value and 6.5-times the historic earnings.
“We acknowledge that AMP has responded to our request and provided the information necessary to reconcile the “0.82-times pro forma embedded value” advertised in the company’s various releases with previously disclosed information. The new disclosures confirm our view that the 0.82-times figure represented was disingenuous and highly misleading,” the letter read.
“Further, the new disclosure that the board knowingly forwent $705 million in franking credit value in considering this transaction causes us great concern. As you know, this value only represented 70 per cent of the face value of franking credits under consideration. The value to AMP’s Australian shareholders is 100 per cent, or just over $1 billion.
The Merlon Capital directors continued: In an act that further undermines our confidence in the board’s understanding of the transaction, you have provided additional disclosures that once again misrepresent its attractiveness. The construct of the “implied price / earnings multiple” of 11-times on slide 3 of your additional background information release is farcical. In particular, we would note that it is not market practice to calculate price / earnings ratios using ‘annualised 6 months’ earnings, and that it is inappropriate to capitalise depressed levels of earnings – for example your ‘implied price / earnings multiple’ reflects an annualised profit margin of only $2 million for the wealth protection business.”
Merlon Capital said it is “encouraged but sceptical” that within the space of a week AMP has committed to extract $40 million of after tax expenses and replace an additional $65 million in after tax earnings lost as a direct result of the transaction.
“We look forward to hearing more about the various initiatives that will achieve these outcomes,” the fund manager said.
On 25 October, AMP announced the successful completion of its portfolio review including an agreement to divest one of its core businesses.
The group will offload its Australian and New Zealand wealth protection and mature businesses (AMP Life) and reinsure New Zealand retail wealth protection for total proceeds of $3.45 billion.
AMP will sell its Australian and New Zealand wealth protection and mature businesses via a sale to Resolution Life for total cash and non-cash consideration of $3.3 billion. The transaction is expected to complete in 2H 2019; subject to regulatory approvals.
The group also announced a binding agreement with Swiss Re to reinsure New Zealand retail wealth protection, releasing additional capital of up to $150 million to AMP prior to completion of sale; subject to regulatory approvals.
AMP is also looking to divest it’s New Zealand wealth management and advice businesses via initial public offering (IPO) in 2019 subject to market conditions and regulatory approvals.