Pru pays £850m in City fees and expenses
I’d not met Tidjane Thiam, the chief executive of the Prudential, till I interviewed him yesterday. And unlike many business leaders I encounter, for whom the expression charmless nerk was probably invented, it’s not hard to see how he has reached the top: he’s persuasive, amusing and self-deprecating.
On the issue of the moment, whether the Pru’s investors should approve his ambitious plan to buy AIA for almost £25bn, he is an impressive salesman.
As if you didn’t know, if you want serious long-term growth, there’s no better place to go shopping for business assets than Asia. And as for the putative treasure sought by the Pru, AIA, it’s at what Thiam describes as an “inflexion point”.
Which means that AIA’s profits are soaring, he says, because of a combination of recovery in the Asian economy and the great sense of liberation of its local management that they’re soon to be freed from the stigma of being owned by AIG, the US insurer that crashed spectacularly in late 2008.
So those valuation ratios, based on historic financial information, which show that AIA is a very pricey purchase, well he would say they’re misleading: he believes that the momentum behind AIA’s progress, and the potential to generate incremental income from combining AIA with the Pru’s existing Asian operations, mean that this deal could look very cheap indeed, by 2013 or so.
He also insists that he and his colleagues have an intimate knowledge of AIA’s main businesses in 10 different countries, because for years they’ve modelled their own Asian operation on AIA’s. So he insists there’s only a small risk that they’ll find poison, rather than gold, in AIA’s coffers.
Here’s my problem: I’ve heard it all before (not from Thiam of course), from bosses of big companies explaining why making a giant acquisition is oh so right.
It’s really not that long ago, for example, that Sir Fred Goodwin of Royal Bank of Scotland and John Varley of Barclays were whispering in my shell-like that the Dutch bank ABN was a corporate dream come true, a buying opportunity that was too good to miss. But as taxpayers – who have picked up a hefty bill for cleaning the mess up – have found out, the deal that was ultimately done, which included RBS buying the rump of ABN, could not have turned out any worse.
So it’s not altogether surprising that some Pru shareholders are far from being sure that they want to pay up for those fat birds that Thiam has spied in the Asian bush. Perhaps it is lack of ambition and imagination on their part, but these investors quite like the British and American birds-in-the-hand that the Pru already holds, even if their plumage isn’t quite so vibrant.
And here’s a statistic which investors need to mull over: according to a 936-page prospectus published this morning, the Pru would pay out a staggering £850m in fees and other expenses to bankers, brokers, lawyers, accountants and fund managers in connection with the takeover and the rights issue to raise £14.5bn.
That’s an astonishing amount of revenue for the City of London. And if you want to see how important that £850m is to the prospects of financial firms, it would be enough to pay the salaries for a year of 4,250 bankers (on the assumption they’re each paid £200,000) or well over 30,000 British employees on average earnings.
More-or-less every big City bank has been offered a piece of this particularly luscious, deep-filled pie. Which means that all of them are in effect on the Pru’s payroll, thus preventing them from publishing objective research for investors on whether this deal is sound or not.
To put it another way, much of the City has a vested interest in seeing the Pru complete this massive takeover. And there would be even more fees for bankers to come, if Thiam were to follow up the purchase of AIA with the sale of the Pru’s operations in the UK and the US – which he told me he would sell if the price were right.
So here’s the question, as old as the City itself (well almost): is the City there to facilitate wealth creation for the benefit of those who provide it with finance, which is actually you and me through our pension savings and deposits; or are the judgements of those who work there as bankers and advisors flawed by the opportunity to skim off rents for their own enrichment?
Those who own the Pru will be asking themselves a version of that question as they decide in the coming weeks whether to back or block Thiam.
View full post on BBC NEWS | Peston’s Picks