UPDATE 2-AXA puts China Taikang stake sale on hold -sources

Fri Dec 11, 2009 6:22am EST

* Draft China rules delay, could complicate Taikang sale

* New rules imply insurance stakes owners should be strategic (Adds more comments from sources, background)

By George Chen and Michael Flaherty

HONG KONG, Dec 11 (Reuters) - French insurer AXA (AXAF.PA) has put the auction of its 15.6 percent stake in China's Taikang Life on hold on growning concerns that some potential buyers may be restricted under rules proposed by the insurance regulator, sources with direct knowledge of the matter said on Friday.

The French insurer's sale of its stake in Taikang has received bids from Singapore state investor Temasek [TEM.UL], Blackstone Group (BX.N), KKR [KKR.UL] and other funds, sources have previously said, with the stake expected to be worth around $1 billion. [ID:nHKG157023]

But concerns about China's new draft rules on insurance company investing have sparked worries that the private equity firms lining up to bid for the stake may fail to match the regulatory standards, the sources say.

The chief worry is that the final rules will clearly prohibit foreign private equity firms from making such an investment.

Taikang, China's No. 4 life insurer, declined to comment. AXA was unavailable to comment.

The draft rules currently being circulated appear to lean heavily toward supporting the idea that corporate, or strategic buyers, are the preferred owner of stakes in China's insurance companies.

For example, article 7 of the draft rules say that an investor should use its own capital to invest and not loans from banks. Article 15 outlines that an investor should have a strong capital base with a certain amount of net assets.

Both articles point to the assumption that the investor is a strategic buyer, rather than a financial buyer such as a private equity firm, which often uses loans and may often have no similar company in its portfolio before taking a stake.

Even more frustrating for the sellers and the bidders is the uncertainty of how and when these rules will be applied.

As a result of the concerns, first round bidders have gone weeks without knowing if they've advanced to the second round, sources say, adding that, for now, the auction is on hold until next year.

The sources are directly involved in the auction but are not allowed to speak publicly about the deal.

Chinese regulations prohibit overseas groups from having financial stakes in more than one insurance company. AXA has said it is selling the Taikang Life stake to meet Chinese regulatory requirements.

AXA also owns a 51 percent stake in an insurance joint venture with China Minmetals Corp, formed 10 years ago. It inherited the Taikang stake when it bought Winterthur Life from Credit Suisse (CSGN.VX) in 2006.

Morgan Stanley (MS.N) has been hired to run the Taikang stake auction. The bank declined to comment on Friday.

The private equity bidders are aware that Taikang plans to go public in a few years, giving the buyout groups an excellent chance to exit the deal with a nice profit.

It was unclear why, so far, no strategic buyers have emerged as bidders for the Taikang auction.

CHINA INSURANCE

Chen Dongsheng, Taikang's chairman and chief executive, and his associates own a combined 14 percent stake, according to a bidding document obtained by Reuters.

Chen, well connected to Chinese insurance regulators, raised his concerns on whether a private equity investor would be good in the long run for Taikang, according to the sources.

The chairman has also signaled his preference to choose a strategic buyer he is more familiar with, the sources say.

AXA is currently the single largest shareholder of Taikang with 15.6 percent. The Financial Times reported earlier this month that as much as 19.9 percent of Taikang is up for grabs.

Taikang's other major Chinese shareholders include two powerful state-owned enterprises -- CITIC Group and Sinopec -- which are both long-time allies of Chen and his management team, according to the sources.

The China Insurance Regulatory Commission has yet to show a clear stance on whether it supported AXA's plan to sell the Taikang stake to a private equity fund, said the sources, adding that like most China deals, Beijing has the final say.

In addition to other Chinese insurers, banks could also show up to the auction, as Beijing is encouraging domestic banks to expand into insurance.

The last sale of a Chinese insurance company stake to a private equity buyer was back to 2005 when the Carlyle Group and U.S. firm Prudential Financial Inc (PRU.N) jointly bought nearly 25 percent of the life isurance unit of China Pacific (601601.SS), Taikang's bigger rival, ranked No.3 in China.

Beijing's view of Western private equity firms remains cautious, though government officials have begun to change their attitude in recent years to encourage private equity-style investments in non-strategic sectors to grow local jobs. (Editing by Jacqueline Wong and Muralikumar Anantharaman)

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