GLG sells as Pru buys
No one can accuse the Prudential’s senior directors of being averse to risk – although, to state the obvious, most of the risk doesn’t actually fall on them but sits with the Pru’s owners.
Against the backdrop of frayed investors’ nerves – with stock prices dropping again in Asia – the Pru is attempting to raise a colossal sum of new money from its shareholders, some £14.5bn, to finance the acquisition for almost £25bn of AIA group, the Asian insurer being sold by AIG of the US.
The fund-raising is 12 days later than planned – because of an order from the UK watchdog, the Financial Services Authority (FSA), that the Pru should raise more capital as a buffer against potential losses, in view of what it calls the risks “associated with current market circumstances and the potential risks associated with the acquisition”.
This new capital takes the form of up to £5.1bn of new hybrid securities – or low-quality, subordinated debt that would only just be in front of equity in the queue for repayment in the event that the Pru were to run into serious difficulties.
In order to win approval from the FSA, the Pru has also had to agree to intensive, continuous, global supervision by the British watchdog and a new structure to prevent contamination of the entire company should one part become poisoned.
The Pru is selling the new shares in this rights issue at 104p each – a discount of 81% to the Pru’s closing price on Friday.
So there would have to be financial Armageddon, and an almost unthinkable collapse in the Pru’s share price, for existing Pru shareholders to refuse to buy the new shares.
But it won’t be plain sailing for the Pru’s management.
Although the Pru has released new figures this morning showing that the AIA is performing better than it thought only a few weeks ago, and it believes that AIA’s post-tax profit from new business can increase by more than $1bn in three years, few would argue that it is buying AIA at a bargain price: the ratio of purchase price to so-called embedded value is 161%, a premium to recent valuations of other Asian insurers.
Which is why some Pru shareholders fear that it is taking an excessive gamble in buying AIA.
It’s not that they dissent from the notion that growth prospects in Asia are vastly superior to those of the US and UK.
But they would argue that what they opted for when they bought into the Pru was a diversified international business, with operations in the UK and US that may be slightly staid but have the virtue that they generate cash. What they didn’t choose to own was a giant, cash-consuming Asian operation, which is what the Pru has chosen to become.
These shareholders would argue that they could invest directly in Asia, without the need for the Pru to take on all the management risks of more than doubling in size and multiplying the number of businesses to control.
Here’s the interesting contrast. GLG, one of the smartest hedge-fund investors in London, announced today that it is selling out to Man Group, while the Prudential – whose investment returns aren’t in the same ball park as GLG’s – is making a record-breaking purchase.
GLG’s owners may be taking Man stock (they are not liquidating) but they presumably believe the valuation of their investment management business isn’t going to get any better.
So, in what the FSA euphemistically calls “current market circumstances”, is this the moment to be a buyer or a seller?
The Pru’s management still has its work cut out to persuade its owners to back the AIA takeover. That deal could yet fall apart.
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