Asiamoney.com: AIA shows how fickle is sentiment

Asiamoney.com, October 6 2010

If there’s a lesson to be drawn from AIA, it’s that we should never assume sentiment is irreversible.

According to people close to the deal – and, let’s face it, with 11 bookrunners before you even get to the Japanese POWL tranche, there’s hardly anyone who isn’t close to the deal – the up-to-US$15 billion IPO of AIA Group has already been fully covered on institutional orders alone by the second day of marketing. Some reports say it was fully covered on day one: either way, well before getting to the Hong Kong public offer, it’s already clear the deal can raise what it needs in what will be one of Asia’s largest ever deals.

If someone had said in June that this could be done by the end of the year, they would have been laughed out of town. That was when Prudential’s bid to buy the company from troubled parent AIG was withdrawn. Sentiment then was toxic: investors had already taken a look at an AIA IPO once, earlier in the year, only for it to be superseded by a Prudential bid that came to nought. It was back to square one, owned by a company owing US$182.3 billion in bailout cash to the US state, with its future uncertain.

And it’s not as if things have gone seamlessly for AIA since. The CEO, Mark Wilson, and the CFO, Steve Roder, have both been replaced since AIA first attempted to hit the markets. Investors in an AIA IPO have to deal with the vast overhang of whatever AIG doesn’t sell in the float, knowing full well that it intends to get out of the whole business at the first opportunity (albeit locked up until a year for half the remaining stake and 18 months away for the rest) and thus likely dilute shareholders. Even if a greenshoe is exercised, it is understood that overhang will be almost half of the business – and a majority stake if the greenshoe is not exercised in full. Plus, there’s the threat of AIG, whether as majority or just the largest shareholder, being put under restriction or direction by the US government. Who wants an Asian insurer part-owned and directed by the US treasury? And is AIA really in the sexiest markets? Its second biggest contributor to profits is Thailand. China accounts for just 5% of the business.

How, then, has it come to this, with fervent demand from powerful cornerstone investors and rampant momentum despite a swamp of competition from other behemoth listings? A full greenshoe would make this the largest Hong Kong listing ever (other candidates, like Agricultural Bank of China or ICBC, raised more overall but a large chunk of it from the Chinese A-share market). Some of the most influential institutional names in the markets have been convinced, among them the Kuwait Investment Authority, one of the savviest sovereign wealth funds in the world.

The speed from a logistical perspective is impressive but easily explained: AIA had already done extensive pre-marketing back at the start of the year and its business hasn’t changed dramatically since then, barring the senior leadership; investors who did their homework the first time AIA approached them have an easy task in revisiting it now. That made a quick return to the market easier.

But it’s the turnaround in sentiment that is most eye-catching. And in this respect, AIA is illustrative of a trend, rather than driving the trend itself. Look at the wave of equity approaching the market now: Global Logistics Properties, a spin-off from Singaporean sovereign wealth fund GIC, could become the city state’s largest ever IPO. Two separate arms of the peerlessly influential Petronas empire in Malaysia are approaching the market. Indonesia still believes Garuda and Krakatau Steel will hit the market this year, alongside far bigger rights issues from, among others, Bank Mandiri. Coal India is likely to become India’s largest ever IPO this month. Market expectation is that all of these deals will get away: after all, if Vodafone can shift US$6.6 billion of China Mobile stock in a few hours when almost all Asian accounts were asleep, as they did last month (with a bit of help from the bookrunners), then there’s reason for optimism.

In fairness, it should always have been the case that a strong, profitable, pan-Asian life insurance business should be well received by investors: it’s one of the best ways to play emerging middle-class wealth in the region. But the fact is something remarkable has happened to both institutional and retail attitudes towards new Asian equity. What a difference six months makes. Now, the big question is just how long the good mood lasts.