Manulife gets an earful over stock dilution

Manulife Financial Corp. chief executive officer Donald Guloien, a seasoned deal-maker, has put himself under intense pressure to pull off some stellar takeovers with the insurer's sudden move to raise $2.5-billion in equity.

Mr. Guloien's decision angered many shareholders. Manulife's shares dropped sharply on news of the share issue, which will dilute existing shareholders. Mr. Guloien had recently suggested he did not want to raise equity, and so now investors are asking some tough questions.

His dual rationale for the decision is that regulators are going to require insurers to hold more capital, and that potential acquisition opportunities are sprouting up faster than he expected.

The market is now watching to see if that actually happens.

"It was very disappointing," John Kinsey, a portfolio manager at Caldwell Securities, said of the move.

"I think it's pretty godawful that there was really no warning about this coming, and all of a sudden this dilution came about," said Stephen Jarislowsky of Jarislowsky Fraser Ltd., one of the company's largest shareholders.

"I feel very strongly that their board is not strong enough, and I am perfectly happy to offer to help them out because I've been a director at many companies and I don't think this situation should occur at the largest insurer in Canada."

The man who runs the U.S. operations at Manulife's main Canadian rival says he's not seeing a plethora of takeover opportunities south of the border. "While there are rumours that are out there about deals that are imminent, I don't frankly believe it," Jon Boscia, the head of Sun Life Financial's U.S. operations, said in an interview yesterday. "I think over the next 24 months we are probably going to see things that are available, but I don't see a need to rush to raise capital because something is right around the corner out there."

Not all of Manulife's shareholders are sold on the idea that it should be making acquisitions right now. "My feeling is that the first thing you do before you go for acquisitions is you get your house in order," Mr. Jarislowsky said. "And, if you'd managed this right, you'd have a balance sheet where you could take on these opportunities anyhow."

Several money managers who own Manulife stock, and investment bankers who work with the company, say that they think this week's share sale is really meant to give the insurer the capital needed to offset money-losing guarantees made to customers on savings products, such as variable annuities. These products are popular with wealthy seniors, and Manulife is a leading player in the field.

Coming off the worst market decline since the Great Depression, Manulife has a $14.9-billion accounting shortfall in the investment portfolio backing its segregated fund and variable annuity business. It has years to fill the gap, given most of the payments it must make to customers are far down the road, and has been raising capital to offset the shortfall. The gap has been closing, and is now half what it was just six months ago. "This share sale is all about building a cushion against losses on variable annuities," said one investment banker close to Manulife.

Deals in this environment are facing other hurdles. For instance, any acquisition that the banks or insurers make require approval from the regulator, the Office of the Superintendent of Financial Institutions.

"If you're making an acquisition, you better do your due diligence, you better be able to afford it, you better know what you're buying, you better have a plan to integrate the systems," OSFI head Julie Dickson said.

Investment banks are running into headwinds as they attempt to move the massive Manulife offering, as roughly a quarter of the shares remained unsold at the end of yesterday's trading session. This is one of the largest share sales ever seen in Canada, and the investment dealers now own the stock. The lukewarm reception reflected an overall decline in the market - the S&P/TSX benchmark was down all day and finished down by 0.45 per cent - and investor uncertainty over Manulife's prospects.

Manulife sold equity at $19 a share late Wednesday to a syndicate of underwriters led by Scotia Capital and RBC Dominion Securities. The stock closed at $20.18 prior to announcement of the transaction. Manulife stocked opened yesterday at $19, the issue price, and closed at $18.95, just below the price of the new issue.