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MetLife Mulls $2B Deal with BBVA

Zacks Equity Research

Last week, Bloomberg reported that MetLife Inc. (MET) intends to purchase the pension-management wing of Banco Bilbao Vizcaya Argentaria SA (BBVA) – AFP Provida SA –based in Chile. The transaction value is expected to be over $2.0 billion.

Spain-based BBVA is looking forward to streamlining its operations by divesting the redundant ones. Additionally, armed with $45.5 billion of assets under management (:AUM), Provida is the largest pension provider in Chile holding about 28% of the market share, based on AUM. Hence, this business appears to be a strategic fit and complements MetLife’s existing operations and growth goals.

On the other hand,as indicated earlier, MetLife continues to focus on long-term growth through higher penetration in the rapidly growing international emerging markets, which includes Latin American regions as well. In May this year, MetLife had charted out its long-term ROE growth goals of 12–14% to be achieved by 2016, driven by higher operating earnings from emerging economies.

Subsequently, MetLife aims to augment the contribution of its earnings from emerging economies to 20% by 2016 from 10.3% in 2011 and about 14% in 2012. Hence, the company’s expansion motives reflect its emphasis on strengthening its financials by 2016, thereby countering the competitive pressure and the low interest rate environment.

In the long run, MetLife expects to build a global brand by adopting a more customer-centric business model. The company also anticipates constructing a Global Employee Benefits business, increasing its emerging markets presence as well as refocusing on its US business.

A Decade of Expansion Through Acqusitions

Over the past several years, MetLife has been growing through strategic acquisitions. In 2001, MetLife had acquired BBVA’s insurance operations in Chile for about $200 million. The company also bought Aseguradora Hidalgo SA, the leading Mexican insurer, for about $962 million in 2002. This was followed by the purchase of Travelers Life & Annuity from Citigroup Inc. (C) in 2005 for $11.7 billion, which helped MetLife penetrate deep into the markets of Japan, Australia and UK.

Most significantly, MetLife added American International Group Inc.’s (AIG) American Life Insurance Co. (:ALICO) in November 2010 for about $16.0 billion, in an attempt to expand across over 50 countries outside the US. This also enhanced the company’s international revenue share from 14% of the total in 2010 to 28% in 2011. The international segment even posted earnings of $2.21 billion in 2011 compared with $780 million in 2010, followed by consistent growth so far in 2012, primarily backed by ALICO. Moreover, in August 2012, MetLife also acquired the life and pension businesses of Aviva in Eastern Europe and integrated it into ALICO.

Overall, we believe that the strategy to gain market share through global diversification and acquisition seems to be apt for MetLife. Despite being adequately liquid, the company is unable to return wealth to shareholders in its full capacity due to its comprehensive capital plan, which has been rejected twice by the Federal Reserve based on the size and scale of its bank operations. This leaves the company with ample funds for its long-term growth.

MetLife retains a Zacks #3 Rank, which translates into a short-term Hold rating and a long-term Neutral recommendation.

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