A slightly farcical start to Prudential’s attempt to buy the Asian life operations of AIG — and turn itself into the HSBC of the insurance world.
The company, which the Wall Street Journal describes as a medium-sized U.K. life-insurance and asset-management company with substantial operations in Asia, has confirmed talks with AIA, but that’s about it.
All we have officially learnt is that the mooted $35bn deal won’t be structured as a reverse takeover, according to Prudential’s statement:
There can be no certainty that these discussions will lead to any agreement or as to the terms or timing of any such agreement. The Company confirms that it is not currently contemplating the implementation of such a combination through a structure that would be classified as a reverse takeover under the Listing Rules of the UK Listing Authority and intends that any combination, if agreed, would be effected through a new holding company.
And that the Pru has requested a suspension of its shares, which for reasons unknown, has been granted by the Financial Services Authority.
Typically, the UK Listing Authority – the part of the FSA that deals with such matters – is loathe to suspend stocks, unless it is a reverse takeover. (Although as readers have noted this looks to be a reverse takeover in all but name; the Pru will need a cash call equivalent to its current market capitalisation to fund the acquisition).
So in spite of the deal being plastered all over the weekend press, Pru investors have been deprived of the chance to trade until:
“the release of a further announcement in due course.”
Reportedly, the Pru will pay $25bn in cash and $10bn in shares and other securities such as preferred stocks and options for AIA. The cash component would be funded by an underwritten rights issue, that could be the biggest in UK corporate history.
From the WSJ:
Prudential’s acquisition of American International Assurance Ltd. will have a $25 billion cash component, funded by a $20 billion rights issue and a $5 billion debt issue, the person said.
Both issues will be fully underwritten by Prudential’s three advisers on the sale–J.P.Morgan Chase & Co., Credit Suisse Group and HSBC Holdings PLC, the person added. Details of the deal and the fund raising will be announced as soon as Monday, the person said.
More The remaining $10 billion cost of AIG will be in the form of a vendor placing, where AIG will get shares and other equity instruments in Prudential, amounting to a 10% stake in the
The view in the market early on Monday is a slight apprehension that the Pru might overpay for what everyone seems to agree would be a transformational deal.
For example, here’s Keefe, Bruyette & Woods:
Given that a combination of AIA and Prudential’s Asian operations would dominate the agency distribution channels – we believe door-to-door selling is the best way to tap the Asian “cash under the bed” savings stock – in the faster growing Asian regions, we believe that they would have a competitive advantage. They would also have a dominant position in the higher margin risk product areas here.
In figure 1 below, given its acute sensitivity to assumed future growth rates, we calculate a rather wide range of $11-28bn for a standalone valuation. We also estimate in figure 2 that the present value of costs savings would be around $4-4.5bn. Taken together, we believe that a value-creating deal could be justified up to $30bn, but we would prefer a price <$25mn if value enhancement is to be demonstrated, given the risk of some attrition among agents post deal.
Figure 1 (click to enlarge).
Figure 2:
Although Merrill Lynch reckons $35bn would be a full and fair price:
This is a full, but fair price, in our view. We estimate the headline EPS multiple is 19x (2010E) or 16x after taking into account cost synergies. This looks high to us but is consistent with four things: 1. the Asian peer group, which trade in the range 18-30x; 2. press speculation regarding the IPO pricing range of AIA; 3. our own fair multiple for Prudential’s Asian business; and 4. the recent multiples proposed by a European insurers for an Asian minorities buy in.
Prudential closed on Friday at 600p, which equates to 12.6x 2010E earnings, 11.4x 2011E. So clearly with the acquisition multiples above where the stock is trading there would be dilution to Prudential’s earnings. We put this at 10% for 2011E and 8% for 2012E. However, Asia would double in significance to account for 65-70% of EBIT and our fair value. So there should be a re-rating of the multiple attached to the company. We put this at more than 2 PE points, which should more than offset the dilution.
So, 10% earnings dilution in 2011 and 8% the year after, although a lot will depend on what level the cash call is pitched at. A discount of 40 per cent looks likely.
But regardless of that, Merrill reckons investors should buy…
So pulling this together, how do we play this? We think this is a good potential deal for the company, we think the numbers do stack up and we would back the management on execution. However, it is a big deal that involves a lot of financing and this together with the headline dilution means the likely initial direction could be down. We would use any deal related weakness as a buying opportunity.
The ultimate share price reaction however should reflect whether Pru is over or underpaying for the business it is reported to be buying. It is our view that this is moderate in either direction and that Prudential’s shares remain fundamentally undervalued. It is quite inconceivable that the joint businesses will trade close to the current Pru multiples (11-12x earnings), in our view. Buying in at these levels should ultimately prove highly rewarding for long term investors.
… when the shares start trading again of course.
Update 10.40 GMT: The suspension is lifted and Pru shares are trading again. Looks like the will uncross around 540p, down from 602.5p at Friday’s close. Full details of the AIA deal can be found here.
Update II 10.45 GMT: Pru shares have uncrossed and are now trading at 536p, down 66p.
And here is a quick summary of the deal terms, courtsey of Olivetree Securities:
- Paying $35.3bn total: $25bn Cash / $5.5bn New Shares / $3bn Mandatory Convertibles / $2bn Prefs.
- Cash Component of $25bn is split: $20bn via an underwritten rights issue / $5bn senior debt.
- Remaining New Shares / Mandatory Convertibles / Prefs all issued to AIG Directly
- Rights issue to run during May.
- Transaction multiple is 1.7x EV, which is top end of expectations. This weekend’s press was intimating 1.5-1.7x.
- Transaction is expected to close in Q3 2010, with the rights issue scheduled to run thru May.
- Prudential will establish a primary dual-listing in HK (similar to HSBC).
Related link:
The mandarin from the Pru – Lex