Splitting Up

Prudential Ends a Very British Compromise

The insurer's newly-liberated European unit needs to find some friends fast.
Photographer: Jason Alden/Bloomberg
At Closing, March 20th
1903.00 GBp

Prudential Plc investors have long been forced into owning a low-growth U.K. business as the price of getting exposure to its racier Asian and U.S. operations. With the insurer poised to split its British and international businesses, this compromise is coming to an end. But who will want the old world rump?

The long-mooted separation, announced on Wednesday, makes sense. The two businesses should attract more investor interest individually than together, meaning their combined value should exceed that of the old Prudential.

True, separation will lead to some one-time expenses and create the additional running cost of a new head office. But there will be business advantages. The new Asian and U.S. insurer may enjoy some capital benefit by escaping Europe's Solvency II regulations because it won't have customers in that region.

These changes should pare Prudential's conglomerate discount, which was about 25 percent on Tuesday relative to UBS analysts' sum-of-the-parts valuation. Small wonder the insurer's shares advanced 6 percent on Wednesday.

Doing the Splits

The insurer's shares jumped on news of the breakup

Source: Bloomberg

Intraday times are displayed in ET.

The uncertainty surrounds the U.K. part of the jigsaw. As things were, fund manager M&G risked being starved of resources. The fast-growing Asian business was always going to have first call on the company's capital. As a standalone operation, M&G Prudential will have a currency for making acquisitions or raising money from shareholders.

But that paper needs to be attractive. The problem the de-merger solves is that most investors bought Prudential for everything but its U.K. business. So M&G will need to find its own supportive investor base.

U.K. insurers have been scrambling to re-weight their businesses away from insurance to fund management -- look at Standard Life Aberdeen Plc's recent merger and subsequent sale of its insurance business. On Wednesday, Prudential also cut a deal to sell about a third of its U.K. annuities book. Legal & General Group Plc is looking much more like a big fund manager than an insurer too.

National Champion?

M&G had record net inflows last year

Source: Company filings

Note: Ashmore reports AUM and flows in dollars; figures converted at year-end sterling exchange rate of $1.35

The hope must be that investors will price a liberated M&G on an asset manager's higher multiple of earnings than the average commanded by British insurers. Using peer multiples and allocating one-third of central costs and debt, its market value could be about 13 billion pounds ($18 billion), UBS estimates.

With assets of $490 billion, M&G falls far short of what Standard Life Aberdeen co-CEO Martin Gilbert calls the $1 trillion club. It will need to bulk up. Record net inflows of 17.3 billion pounds last year, though, suggest M&G's business model is reasonably robust.

But investors have a widening choice in U.K. asset managers. Prudential calls M&G a potential national champion as the industry consolidates. It's not alone in seeking that prize.

--With assistance from Gadfly's Mark Gilbert.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Chris Hughes in London at chughes89@bloomberg.net

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    Edward Evans at eevans3@bloomberg.net

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