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Demutualisation Down Under

Australia&#39s biggest mutual, the 148-year-old Australian Mutual Provident, is expected to get the go-ahead next week from its 1.7 million members for a demutualisation deal that will give policyholders up to £5bn.

Australian economic observers have watched the £34bn corporatisation of the UK&#39s financial institutions, particularly building societies, and know the windfalls to members have been a considerable boost to the economy.

Although AMP policy-holders will be offered the opportunity to take cash if the demutualisation goes ahead, it is believed that most will go for the shares, given the very real likelihood that demand will push AMP&#39s market value to a big premium at listing.

Institutional investors are champing at the bit to get a slice of a company which is expected to jump into the list of Australia&#39s 10 biggest listed companies. In AMP, they see a unique double.

First, it is a successful operator in the country&#39s financial services sector, which has provided investors with strong price gains over the past five years. As in the UK, financial services companies have been the fastest-growing sector on the stockmarket.

At one point, National Australia Bank&#39s market worth topped mining giant BHP, making the bank Australia&#39s biggest company, if only for a few hours.

Second, AMP will offer the best chance yet to get exposure to the life insurance sector, which was virtually out of bounds to investors until a year ago and is still relatively under-represented on the Australian stockmarket.

Apart from QBE, which is regarded as a general insurer with a life division, the listing of AMP&#39s nearest life insurance rival, the £2bn National Mutual, late last year was the first time that stockmarket investors could get access to a major domestic life company.

National Mutual&#39s decision to list came following a takeover by French giant Axa, which decided to float 49 per cent of the company. The takeover comes after National Mutual&#39s failed mid-1980s growth plan, based on a risky pricing and investment strategy.

Overly generous capital guarantees and the stock market crash put paid to that ambition although it was almost a decade before National Mutual decided that it could no longer afford to be independent.

National Mutual Holdings listed at about $A1.60 a share and has recently traded at up to $A2.35, a significant advance on the year.

Smaller life insurer Colonial (formally Colonial Mutual) came to the stockmarket less then six months ago and has already climbed to more than $A4 a share from its $A2.60 listing.

Colonial&#39s decision to con- vert was based on a simi lar strategy to that of AMP – to build a broad-based financial services group.

While AMP is considered likely to acquire a bank after demutualisation, Colonial bought a sizeable regional bank, the State Bank of New South Wales, on the understanding with the regulators that demutualisation would take place.

AMP, however, may run into more problems in obtaining approvals for takeovers because of its huge size. But it also sees flexibility in raising capital as a key issue, which has also been behind several demutualisations in the UK. Analysts agree.

Helmet Englehert, an analyst at stockbroker Hartley Poyton, says the demutualisation process is important as the lines of distinction between financial services companies becomes less clear.

He says: "The capital and corporate structure of a mutual is cumbersome. It does not lend itself to mergers and acquisitions.

"From a regulatory point of view, it is also important.

In a mutual, who controls the board of management? Who elected the board? There is not the same level of accountability."

Englehert says that, as AMP looks to expand, the advantages of using shares in a merger rather than paying hard cash is also significant.

"In a global context, AMP is not a big player. It has to make a decision where to be. To go forward, it is much better to have a defined capital base."

For AMP, demutualisation is just another step in realising its ambition to become a player in a rapidly globalising marketplace.

In its proposal on demutualisation, AMP sees huge opportunities as the financial services sector changes.

Once it can discard the clothes of a mutual, it believes it can take on the banks more easily in their own market while protecting its position in the fast-growing Australian superannuation and pension market. As other players rationalise, AMP can enjoy the lean structure it created earlier this decade.

Banks, for instance, are closing branches across the country as they realise the high costs of bricks and mortar when newer and brasher competitors are taking business through electronic and direct banking services.

In the 1980s, sales at AMP increased to more than £500m a year via a massive salesforce.

But then, in the early 1990s, echoing develop ments in the UK, it cut a huge part of this operation, changing arrangements with agents and, in many cases, simply ending their agency.

The company admits that the transition was tough but says it is now better placed for the future.

Direct salesmen currently account for only one-fifth of life policies sold in Australia, a big drop in this form of sales which used to dominate the market, mainly because of AMP&#39s decision to reduce its salesforce.

Multi-agents, who are tied to a number of life offices, are now the biggest distributors of life insurance, commanding a 35 per cent market share.

Salaried staff account for 25 per cent of sales and independent brokers and direct-response marketing share the remaining 20 per cent equally.

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