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AMP hints that it can improve AXA Asia bid

* H2 underlying profit A$405 mln vs A$373 mln yr ago

* Fears of bid battle, capital raising send shares down

* CEO hints at flexibility to improve AXA bid

* AMP-AXA Asia merger would make competitive sense-CEO

* Shares underperform on bidding war, capital raising fears

(Adds trader, analyst view, share action and background))

By Narayanan Somasundaram

MELBOURNE, Feb 18 (Reuters) - Australia's No.2 wealth manager AMP Ltd AMP.AX signalled on Wednesday it had room to improve its $11.6 billion bid for AXA Asia Pacific, AXA.AX unnerving investors who sent its shares down.

AMP is in a bid battle with the country's top lender, National Australia Bank NAB.AX, for AXA Asia Pacific, which offers one of the few major consolidation opportunities left in Australian financial services.

AMP Chief Executive Craig Dunn, delivering the company’s annual results that broadly met market expectations, said AXA Asia Pacific remained a strategically attractive target despite AMP being trumped by NAB’s $12 billion offer.

At 0039 GMT AMP shares were down 1.4 percent at A$6.18 after falling nearly 2 percent in early trade. The benchmark .AXJO was down 0.6 percent.

“If they’re going to go into a hefty bidding war and pay an unrealistic price, that’s certainly a concern,” said Angus Gluskie, a portfolio manager at White Funds Management.

AXA Asia Pacific has already rejected AMP’s offer, but Australia’s competition regulator recently tipped the scales back in AMP’s favour after raising more concerns about NAB’s bid than with the AMP offer. NAB is already’s Australia’s largest wealth manager.

AMP itself has been at the centre of takeover talk with market speculation it could become a target of one of the big four banks if it were to lose a bid for AXA Asia Pacific.

AMP’s Dunn declined to comment on that market speculation but said there was a long way to go in the AXA deal and AMP was not in a hurry.

RBS said in a research note there was a risk of capital raising, which could depress the stock, if AMP were to return with a higher offer.

BID FLEXIBILITY

AMP’s Dunn hinted that his ‘best-and-final offer’ order issued in December for AXA Asia Pacific may no longer be an obstacle.

“The more the circumstances continue to change, the more the time moves on, the more flexibility we have on the bid,” Dunn told a results briefing, declining to be drawn any further. “Our focus on M&A is very much on AXA.”

His comment on “changing circumstances” referred to AXA Asia Pacific’s recent strong profit results. On Wednesday, AXA Asia Pacific reported its best annual results in six years and promised strong growth in 2010. [nSGE61F0IW]

The Australian competition watchdog, which has yet to make a ruling, is not the only hurdle for the two rival bidders. AXA Asia Pacific's parent, AXA SA AXAF.PA, which majority owns the Australia-listed business, will also have a casting vote. Under both the AMP and NAB proposals, AXA SA would retain the Australian subsidiary's Asian operations. The French insurance giant has yet to reveal its position on the two proposals.

Dunn latched on to the competition watchdog’s view that it would be better for Australia to have a strong wealth manager in a merged AMP-AXA to compete against the country’s four big banks.

“Australia will be better off if we have a fifth pillar, which is a non-bank,” he told reporters.

AMP reported 27 percent net profit growth for 2009, bolstered by a jump in investment returns as markets recovered last year.

Underlying profit in the second half rose 8.6 percent to A$405 million ($364 million), largely in line with market expectations, on lower costs, improved markets primarily in the second half.

The company warned that investment markets may remain volatile as the outlook for the global economy was still uncertain, and said it preferred to hold capital as investor confidence remained shaky.

“We will continue to actively manage our capital base to ensure our balance sheet strength provides the flexibility to grow the business and withstand volatile investment markets,” Dunn said.

($1=1.114 Australian Dollar)

(Editing by Jeremy Laurence and Lincoln Feast)

((sonali.paul@thomsonreuters.com; +61 3 9286 1419; Reuters Messaging: sonali.paul.reuters.com@reuters.net))

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