China's Ping An Insurance will pay Ç1.8 billion ($2.65 billion) for a 4.2% stake in Belgian-Dutch financial services firm Fortis.

The deal is the latest in a series of cross-border investments by Chinese financial services companies. Shenzhen-headquartered Ping An Insurance is making the investment with policyholders' funds, making it a portfolio investment for the firm. It has already received all the necessary approvals for the deal.

ôFortis has been seeking to induct a large shareholder but was keen that the investor be strategic in nature,ö explains a source close to the deal.

Ping An purchased the shares via the open market, paying an average of Ç19.05 per share. The price translates to 7.7 times forecast consensus earnings and 1.1 times book value. Deutsche Bank says in a research update issued yesterday that ôthe price appears reasonable, especially in light of FortisÆs 25% to 30% share price decline since June 30ö.

FortisÆs share price has been falling as a result of bearish sentiment on financial stocks and because the market is uncertain about how well Fortis will be able to integrate the parts of ABN AMRO that it is acquiring. Fortis is paying Ç24 billion for ABN AMROÆs consumer and commercial banking businesses in the Netherlands, and private banking and asset management businesses globally.

FortisÆs shareholders endorsed the ABN AMRO acquisition by picking up the majority of their rights entitlements in a Ç13.2 billion issue which closed on October 10. Merrill Lynch is reaping the benefits of having backed the RBS-Santander-Fortis consortium on its bid for ABN AMRO. The US bank, which recently underwrote and lead managed the Fortis rights issue, advised the firm on the acquisition of a stake by Ping An.

Meanwhile, for Ping AnÆs advisor JPMorgan, it was the second time this year that the US investment bank sat across the table from Fortis. In March, JPMorgan represented Richard Li's company, Pacific Century Insurance, on the sale of a 51% stake to Fortis.

Ping An becomes the largest shareholder in Fortis via the share acquisition. Significantly, and in contrast to the other outbound financial institution deals from China, Ping AnÆs investment does not enrich FortisÆs coffers because the shares have been bought on the secondary market.

However, as the deal is the result of ôan action in concert between Ping An and Fortisö, the board of directors of Fortis has invited a Ping An nominee to join the board. Ping An will be entitled to board representation as long as its stake stays above 4%. Louis Cheung Chi Yau, executive director and group president of Ping An, will be that nominee, subject to approval of Fortis shareholders at the next shareholder meeting in April 2008.

ôThe deal brings together one of the only global players with proven success in the bancassurance model and a Chinese firm aspiring to build a significant bancassurance-based franchise,ö says a source.

Ping An has agreed for a period of three years to limit its shareholding in Fortis to 4.99% unless it has reached prior agreement with the Fortis board. In the event that Fortis endorses the acquisition of a higher stake by another shareholder, Ping An will be allowed to match the stake.

Fortis has stated an aim to grow the proportion of profits it derives outside the Benelux countries to more then 30%. Further, it achieves another aim of diversifying its board and its shareholding.

ôThe deal is an ALM (asset liability management) play for Ping An,ö says a specialist, as Fortis has a dividend yield of around 7% and Ping An has a number of legacy policies. The deal also allows Ping An to denominate part of its investment portfolio in euro.

But other market participants are surprised by the size of the investment. Ping An has regulatory approval to invest up to 5% of its assets overseas. Based on assets at June 30, Deutsche Bank reckons Ping An has committed 64% of its total permitted overseas allocation to the one deal. "[This] appears strange given previous comments about risk minimalisation via spreading of exposure," says Deutsche.

Fortis already owns stakes in insurance firm Taiping Life, and asset management firm Fortis Haitong Investment Management, which it clarified would ônot be impacted by Ping AnÆs investmentö.

ôIs there more to this deal than meets the eye?ö asks Deutsche in its research update. The parties have not indicated any further underlying rationale in their official statements, though they did express the intention to ôexplore co-operation in some of their activitiesö.

Notwithstanding DeutscheÆs concerns, hold recommendation and price target of HK$59.10 ($7.59) on Ping An, the Chinese insurerÆs shareholders seemed happy with the Fortis investment. Ping An shares gained 6.7% to close at HK$83.20 yesterday.

HSBC has an investment in Ping An via a 19.9% equity stake. It first acquired 10% of Ping An in 2002, and then subscribed to another 10.5% when the insurance firm IPOed in 2004. In 2005, it bought the Ping An shares held by Goldman Sachs and Morgan Stanley, bringing its total shareholding to the current level. HSBC will be calculating a handsome (paper) gain on its shareholding.