Troubled wealth manager AMP was forced to defend the sale of its life insurance businesses at a discount to British Resolution Life for $3.45 billion.
However the sale of these assets - at almost a fifth below book value - was at a much larger discount than shareholders had assumed.
Worse, only $1.9 billion of the consideration would be in cash. With $300 million in preference shares in AMP Life and a $1.1 billion non-cash component, investors were scared they wouldn't see proceeds from the sale for a number of years, if at all.
Subsequently, AMP shares plunged by more than 25 per cent, finally hitting a new low of $2.32 last week.
With the collapse in share price and mounting investor pressure, AMP on Wednesday responded to market criticism and justified the sale price of $3.45 billion.
While originally vague on some of the questions around costs and capital, AMP said it would return the majority of net cash proceeds to shareholders.
AMP also advised of plans to remove $40 million per annum of stranded costs by the end of 2020 and to recover $65 million of the $80-$90 million of lost earnings in wealth management because of the sale.
This promise sent AMP shares up 6.9 per cent per cent to $2.46 by the close of business Wednesday.
“Overall, while we still estimate slightly different sale multiples than AMP, there is broad acknowledgment from AMP that this business was suffering more issues than we previously assumed, and hence outer year forecasts were likely inflated," said Credit Suisse analyst Andrew Adams.
Can't compete with global rivals
However, he conceded that the commitment by AMP to remove the stranded costs and most of the Wealth Management lost earnings is a positive.
The financial services giant said on Wednesday it had sold the business because it was no longer able to compete against global competitors with lower cost of capital, greater scale and geographic diversification.
It would have had to inject significant capital to keep the business growing and would have remained exposed to volatile earnings.
AMP highlights that on an annualised 2018 first half numbers, the asset sales equate to a price earnings multiple of 11 times.
The issue with this analysis however, Adams stressed, is that most investors would not have been assuming that wealth protection would never again make money and likewise that the negative experience would continue in New Zealand.
“Comparing to our previous 2019 forecasts, we estimate a 8x PE versus AMP's 11x.
"Further, after adjusting for the one-off costs that will be funded from the sale price, we estimate a PE of close to 7x."