Prudential Breakup Could Increase Value by 75% Over AIA Deal, Analyst Says
Prudential Plc, the U.K.’s biggest insurer, should consider breaking up rather than buying American International Group Inc.’s main Asia unit for $35.5 billion, analysts and investors say.
Selling Prudential’s British, U.S., Asian and fund- management units could raise about 24.2 billion pounds ($37 billion), or about 75 percent more than the insurer’s market value, according to Barrie Cornes, a London-based analyst at Panmure Gordon & Co., who described his assumptions as “conservative.” The stock dropped 6 pence, or 1.1 percent, yesterday, valuing Prudential at 13.7 billion pounds.
The insurer’s biggest investor, Capital Research & Management Co., has held discussions with three companies including Aviva Plc and Resolution Ltd. about carving up Prudential’s assets, the Times of London reported yesterday. Chief Executive Officer Tidjane Thiam needs 75 percent of shareholders to support a $20 billion rights offer to fund the purchase of AIA Group Ltd. and will publish a prospectus to win over investors on May 5. Investors vote on May 27.
“I’d like the management to consider a breakup,” said Paul Mumford, who helps manage 600 million pounds at London- based Cavendish Asset Management Ltd. including Prudential shares. “It would be much less risky than going down the Asia route.”
Prudential spokesman Ed Brewster declined to comment on the possibility of breaking up the company. Talks with shareholders have been “constructive,” he said. Barry Stowe, the insurer’s Asian CEO, said earlier this month investor support for the deal was “overwhelming.”
Capital spokesman Luxman Nathan declined to comment. Capital, which is based in Los Angeles, increased its stake to 12.0 percent of Prudential up from 11.9 percent on April 8, according to a regulatory filing. The company has $1.06 trillion under management.
“A breakup is a possibility as Prudential tries to raise a lot of money through the rights issue,” said Jonathan Jackson, head of equities at London-based Killik & Co., which has 2 billion pounds under management including Prudential shares. “Shareholders are also concerned about risks such as the integration of AIG’s Asian business.” Jackson said he still favors the deal because of the potential for long-term growth.
Resolution may purchase Prudential’s U.K. division while London-based Aviva, the U.K.’s second-largest insurer, could buy the U.S. unit if the company were sold off, Panmure’s Cornes said. Resolution is seeking to build a U.K. life insurance firm valued at 10 billion pounds in the next 18 months. Aviva’s Chief Executive Officer Andrew Moss said in October he’s seeking to make acquisitions in the U.S.
Aviva spokeswoman Sue Winston and Resolution spokesman Alex Child-Villiers, both in London, declined to comment.
“There’s a huge amount of uncertainty, so people are considering their options,” said Tim Rees, who manages about 800 million pounds at Insight Investment Management Ltd. in London. “We need to be more confident of Asia’s longer-term growth profile before we can determine whether this is a good deal.”
Prudential’s Asian business could on its own be valued at as much as 14.7 billion pounds if the company is broken up, said Cornes, who has a ‘hold” recommendation on the stock. He said the acquisition will likely be approved by shareholders.
“Every argument the management can put up for buying AIA is an even better argument for selling or floating their own Asian business,” said Jonathan Newman, an analyst at Brewin Dolphin Ltd. in London, which owns Prudential stock. “The higher valuation of businesses in Asia means a sale could be far more profitable in the short run for Pru shareholders than buying something such as AIA.”
Prudential may struggle to sell any of its business units on their own because they rely on other divisions in the group, said Marcus Barnard, a London-based analyst at Oriel Securities Ltd., with a “sell” rating on Prudential.
“If you open up Pru, it’s not like looking at a box of eggs where you can pluck one out,” he said. “It’s more like trying to take out an organ. There are many strings and arteries attached.”
Prudential’s Thiam said March 1 the insurer didn’t need to sell assets to fund the expansion in Asia. The U.K. division helps maintain Prudential’s credit rating and pays the dividend, he said.
“There’s only merit in a breakup if you get a decent price,” said Julian Chillingworth, who helps manage $21 billion including Prudential stock at Rathbone Brothers Plc in London. “There’s only one buyer in the U.K., Cowdery, and I don’t see people queuing up for insurance assets.”
Prudential is aiming to lessen the impact of investor unrest in the U.K. by attracting more shareholders in Asia. The insurer plans to list in Hong Kong and Singapore on May 11, which would allow investors to take part in the rights issue vote later in the month.
Many Asian investors intended to invest in an initial public offering of AIA Group and are likely to back Prudential’s purchase, Thiam said last month.