View from the hole

By MARK FRYER

These are not comfortable times to be an AMP shareholder.

Hardly a week goes by without more bad news from a company that was once regarded as the definition of a rock-solid financial institution.

Now AMP has a grand plan to dig itself out of the hole and start rebuilding. But what does it mean for the company's shareholders, 90,000 of them in New Zealand?

First, a little history


For about 150 years, AMP was a mutual society owned by its policy-holders.

That changed just under five years ago when it turned into a company, owned by shareholders.

As part of the change, policy-holders were given shares.

This was not unusual - many other mutual organisations, such as New Zealand's Tower, did the same thing.

At the time it looked like a sweet deal. When the shares began trading on June 15, 1998, they fetched prices beyond the most optimistic forecasts.

In their first day on the market AMP shares traded for as much as A$45 in Australia and $31 in New Zealand.

At the end of the first day the share price closed at a slightly more rational, but still spectacular, $26.71 in New Zealand.

After listing, the share price fell, then rebounded in 2001, briefly passing $27.

But for the past 12 months or so, AMP shares have gone nowhere but down.

The plunge steepened at the start of this month; since May 1 the share price has fallen more than 40 per cent and at last sighting the shares were trading at $5.70.

That means a small shareholder who has held on to a parcel of, say, 400 shares now has an investment worth about $2300, less than a quarter of the $10,700 or so it was worth back in 1998.

What went wrong?

In short, AMP's management seems to have had the reverse of the Midas touch. Every venture it pursued turned not into gold but something much messier.

One example was the purchase of another Australian insurer, GIO, completed in 1999.

This turned out to be longer, more complicated and more expensive than expected.

But the biggest wounds have come from AMP's desire to be more than just a big fish in the relatively small Australasian market.

In pursuit of that goal it has bought a stable of British companies involved in the insurance and funds management businesses, including London Life, Pearl Insurance, Henderson and National Provident.

Some of those purchases were made long before AMP turned itself into a company, some were made since.

Those businesses may not have been as desirable as AMP thought, but many of the problems were masked in the late 1990s as share prices soared and AMP shared the gains.

Since then, falling share prices have hit AMP's British operations hard. New business has shrunk, and AMP has had to pour money into the businesses to provide the returns guaranteed to policy-holders.

Life insurer Pearl has been forced to stop taking on any new business.

In the year to last December, the British businesses accounted for A$714 million ($800 million) of AMP's A$896 million loss.

As chairman Peter Willcox told the company's annual meeting in Sydney on Thursday: "AMP had too much of your money in the wrong business, at the wrong time, in the wrong place."

What is AMP doing about it?


First, it is raising more money. It has already obtained another A$1.22 billion by selling shares to big institutional investors. Next, it will go to smaller "retail" investors looking for as much as A$750 million.

But that's only part of a much bigger strategy that involves splitting AMP into two parts.

One part, which will probably keep the AMP name, will include the Australian and New Zealand insurance and funds management businesses, plus a venture in India.

The other company, likely to be named Henderson, will include the British life insurance businesses, AMP's half-share in Virgin Money and the British, European and North American operations of Henderson Global Investors.

Most of the money AMP is raising will be used to give those British operations a debt-free start in life.

Both new companies will be listed on the Australian sharemarket, and AMP says Henderson may later be listed in London, too.

This plan, says AMP, will create "two new strong, regionally focused listed companies".

Unkinder commentators have suggested it will create one company with a chance of regaining some of its former strength (AMP) and another that is a grab-bag of all the bits no one wants (Henderson).

AMP's own numbers suggest that Henderson is likely to be much less profitable than the new AMP, and it is not expected to start paying a dividend until the 2005-06 financial year.

If the split goes ahead - and that is not a foregone conclusion - shareholders' stakes will be split, giving them some shares in AMP and some in Henderson. How many in each? That won't be known until September or October.

What's the offer?


The next instalment in this tale comes on Wednesday, when the offer to shareholders opens.

Until then we don't know the details, but AMP has already outlined the main features of its offer.

Under the deal, existing shareholders will have the chance to buy up to A$5000 ($5600) worth of AMP shares.

It doesn't matter whether you now own 500 AMP shares or 5000 - the maximum you can buy is A$5000 worth, although you will be able to buy less.

What's the price?

We don't know yet. The most it will be is A$5.50, which is the price AMP received when it sold A$1.22 billion worth of shares to institutions at the start of this month.

But the price could be lower. The final price will be based on the average trading price in the 15 days after the offer closes (on June 13), minus a 5 per cent discount.

If that figure works out at less than A$5.50, then investors will get the shares at the discounted price. If it is higher, A$5.50 is still the maximum.

Anyone who takes up this deal will be buying shares in the existing AMP, complete with the unloved British operations.

Later in the year, assuming that the carve-up goes ahead, those shares will be divided into shares in the "new" AMP and shares in Henderson, as will all existing AMP shares.

What's to worry about?


Rather a lot.

The price of the retail offer is not known, and the split is not a done deal.

It has to be approved by shareholders, and must also get past regulators in Britain and Australia.

Another unknown is how the shares will be divided between the "new" AMP and Henderson.

While the Australasian operations may have a reasonable prospect of recovering, how many investors really want a stake in a British financial services company with serious problems?

Would-be investors might also want to ponder the effect on AMP's business. While AMP has been reassuring its customers, such as life insurance policy-holders and unit trust investors, the company's well-publicised woes are hardly likely to attract new business.

In Britain, there have already been suggestions that some aggrieved life insurance customers could take legal action.

Dividend payouts (46Ac a share last year) are also likely to be cut hard.

And there is a more fundamental question. Looking at the mess AMP has created, why would investors trust it with any more of their money?

Any positives?


The brightest hope may be that, once AMP splits, the two resulting companies will become targets for takeover offers. This would be good news for shareholders as such offers generally lift the share price.

A takeover of AMP has not been possible because the company's rules prohibit it, but that limitation expires next month.

A number of Australian banks and other companies have been mooted as potential buyers for the "new" AMP, although some have ruled themselves out.

A takeover of the British assets seems less likely. After all, if AMP could have sold them it would have done so, and many of the potential buyers aren't exactly robust themselves.

And, even if there are suitors, a takeover of either of the new businesses would still have to get past regulators.

What happens next?


While many of the details of AMP's plan have yet to emerge, at this stage the timeline looks like this:

* May 21: retail share offer opens.

* June 13: retail share offer closes.

* September/October: More details of the split plan revealed.

* November: Shareholder, regulator and court approval sought.

* December: AMP splits in two.


* To contact Personal Finance Editor Mark Fryer write to: Weekend Herald, PO Box 32, Auckland. Email Mark Fryer. Ph: (09) 373-6400 ext 8833. Fax: (09) 373-6423.