Prudential Shares Fall in Hong Kong Debut Ahead of Equity Sale to Fund AIA
Prudential Plc, which is seeking finance for its acquisition of the main Asian life unit of American International Group Inc., fell on its debut in Hong Kong today after the U.K. insurer moved 2 percent of its London- traded shares to the city’s exchange.
Prudential close at HK$57.20 at 4 p.m., 4.2 percent lower than the London closing price of 530 pence, or the equivalent of about HK$59.69 according to a company statement to the Hong Kong stock exchange yesterday. Hong Kong’s benchmark Hang Seng Index fell 3.5 percent. Prudential, which also listed shares in Singapore today, traded at $7.37 as of 4:27 p.m. there.
The Hong Kong and Singapore listing gives Asian investors more opportunities to buy Prudential shares ahead of a $21 billion rights offer. The share sale is to finance its $35.5 billion purchase of AIA Group Ltd. in the largest acquisition in the London-based company’s 162-year history.
“Don’t expect anybody to get too excited about this one,” Alex Wong, asset management director of Ample Capital Ltd. in Hong Kong, said before the listing. “Current attitude toward the financial industry is pretty negative. With regulators getting in, it doesn’t offer a very sexy story.”
The Asian debut was delayed for 14 days after U.K.’s Financial Services Authority held up publication of details of the rights issue earlier this month on concern about the insurer’s capital reserves after the takeover.
Stakeholders transferred from London to Hong Kong 50.97 million shares, or 2 percent of the 2.534 billion shares Prudential had on issue by a May 19 deadline, enabling them to be traded in the latter city, according to a statement through the Hong Kong stock exchange.
The AIA acquisition would make Prudential the biggest non- Asian life insurer in Asia and double operating profit from the continent to 3.26 billion pounds ($4.7 billion) by 2013, Chief Executive Officer Tidjane Thiam said. The combined Prudential- AIA would be the largest life insurer in Hong Kong, Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam.
Thiam, who is staking his job on the deal, needs 75 percent of shareholder support for the biggest rights issue in U.K. corporate history. An investor vote is scheduled for June 7.
The risks involved in the takeover of AIA are “manageable,” Prudential Chairman Harvey McGrath said in an interview on Bloomberg Television in Hong Kong today.
“The Prudential business is very similar to the AIA business,” McGrath said. “Indeed many of our executives used to work for AIA. So the risks of us putting them together is actually very manageable.”
There has been “a lot” of interest from Asian investors, McGrath said. Prudential could have 10 percent to 20 percent of its stock traded in Asia over the next 12 to 24 months, he added on a conference call with reporters today.
Government of Singapore Investment Corp., the manager of more than $100 billion of the city-state’s foreign reserves, and Qatar Holdings LLC, the Doha-based arm of the Qatar Investment Authority, signed on as underwriters of the sale, according to a document posted on the Hong Kong stock exchange website.
China Investment Corp., the nation’s $300 billion sovereign wealth fund, and Citic Group, the largest investment company owned by the Chinese government and Prudential’s Chinese partner, are sub-underwriting the rights issue, Hong Kong Economic Times reported on May 20.
Hong Kong tycoons including Cheung Kong Holdings Ltd. Chairman Li Ka-shing and New World Development Co. Chairman Cheng Yu-tung were among Asian billionaires invited to participate in the sale, Hong Kong’s Chinese-language newspaper Ming Pao reported on May 19.
“The fact that they are talking to the likes of Li Ka- shing and others on the rights indicates they are keen to get as much support as possible,” said Andrew Sullivan, a sales trader at MainFirst Securities Hong Kong Ltd. “There are still concerns over the deal as the buyout of AIA still faces challenges from shareholders in London.”
Shareholders such as Neptune Investment Management Ltd. in the U.K. have criticized Thiam’s handling of the deal, including not initially providing enough information to investors and setting an unrealistic timetable. Managing director Robin Geffen said earlier this month that he is trying to rally fellow stakeholders to oppose the deal.
Cavendish Asset Management Ltd. in London is among investors urging Thiam to consider breaking up the company.
Investors and analysts such as CLSA Asia-Pacific Markets’ Patricia Cheng have cast doubt on Prudential’s projection of cost savings and the revenue boost from the deal. Assumptions used by Prudential to push up the value of AIA were too aggressive, Hong Kong-based Cheng said in a May 18 note to clients.
Prudential’s London-traded shares have fallen 12 percent since Feb. 26, the last day before the fundraising was announced.
Insurers are traded at higher valuations in Asia than in Europe. China Life Insurance Co.’s Hong Kong shares trade at about 2.3 times the embedded value of the nation’s largest insurer for 2011, compared with Prudential’s 0.8 times, according to CLSA’s Cheng. Embedded value is a measure used by insurers to estimate the value of future payments from existing policyholders.
“Investors are attracted to Prudential because they can buy into the AIA business at a low price,” said Francis Lun, general manager of Hong Kong-based Fulbright Securities Ltd. “That’s much cheaper than stocks like Ping An or China Life. I don’t think their projection on AIA’s growth is too bullish.”
Still, Prudential should have spent more time to court Asian investors instead of rushing to list its shares on the local exchanges without selling new stock, Ben Collett, head of equities at broker Louis Capital Markets (Hong Kong) Ltd., said before today’s debut.
“Failing to show that kind of respect to the local investors has cost companies dearly in recent times,” he said.