Shares in Amlin (LSE: AML) are around a third higher today after the company became the subject of a 670p per share all-cash takeover offer from Japanese sector peer, Mitsui Sumitomo Insurance Company. The deal values Amlin at around £3.5bn and represents a 36% premium to its closing price from 7 September of 492.5p and a 32.9% premium to the volume weighted average closing price per Amlin share for the month prior to 7 September.
Crucially, the directors of Amlin consider the deal to be ‘fair and reasonable’ and will recommend that the bid is accepted by the company’s shareholders. In addition, Invesco and Majedie Asset Management have also agreed to vote in favour of the deal, which means that around 16% of Amlin’s shareholders are already openly backing the takeover. And, while regulatory approval is needed, the takeover is expected to be completed in the first quarter of 2016.
Clearly, an offer for Amlin was more likely than for most businesses due to the exceptionally low valuation on which its shares were trading. For example, Amlin’s price to earnings (P/E) ratio stood at just 11.8 prior to the bid, with its price to book (P/B) ratio of 1.38 also an indicator that its shares offered excellent value for money. Furthermore, a dividend yield of 5.7% indicates that Amlin’s shares were cheap and susceptible to bids from rivals seeking to expand and/or diversify their risk profiles.
On the face of it, the deal appears to be a rather generous one since it values Amlin at a significant premium to yesterday’s share price of 493p. And, upon further inspection, this appears to be very much the case. That’s because the offer values Amlin at a P/E ratio of 16 and a P/B ratio of 1.96 – both of which are relatively high when Amlin’s near-term prospects are taken into account.
For example, Amlin is forecast to post a fall in its bottom line of 12% in the current year, followed by a further decline of 7% next year. This may have caused investor sentiment to weaken somewhat in the short run, although a major share price fall was relatively unlikely due to Amlin’s super-high yield, which should have provided support for the company’s valuation. Still, with Amlin’s shares having risen by 25% in the last three years, further capital gains could have proved to be somewhat elusive.
Therefore, the offer appears to be a very good one for investors in Amlin. Certainly, they will be losing a top notch income stock and, while a yield of 5.7% is available elsewhere in the FTSE 350, the reliability that Amlin offers regarding its dividends is rather more difficult to find.
However, all investors in Amlin will make a capital gain on the deal and, alongside dividends received, this means that investing in Amlin has been a worthwhile exercise. And, with the FTSE 100 having fallen by 1,000 points in recent months, the deal provides a useful cash boost through which to buy another high quality company at a deeply discounted price.
