Oh dear. This wasn’t in the script.
Prudential’s share price on Tuesday morning:
That takes the share price decline since the “transformational” deal to buy AIG’s Asian assets was announced on Monday morning, to around 18 per cent.
Now the press reaction in the UK to the deal was pretty cool.
For example, the Guardian’s Nils Pratley:
The heart sinks when a chief executive describes a deal as “transformational”. Too often the word is used to deflect attention from the fact that a transaction is so big and so complex that it will be years before outsiders can judge whether the acquirer got value for money, by which time the architects may have moved on.
Prudential’s proposed $35bn (£23bn) acquisition of AIA fits this profile. That doesn’t mean the deal is necessarily the wrong one, just that widespread applause for Tidjane Thiam’s bold move feels premature by about half a decade.
And the FT:
Prudential shareholders still remember the last time the assurer raised £1bn through a rights issue in 2004 to “take advantage of growth opportunities” in the UK.
One disgruntled shareholder notes there has been little but dividend cuts and poor returns since. Perhaps, says another investor hopefully, this rights issue will trigger the often-discussed break-up of the group.
However, what seems to be behind the share price weakness is not the rationale behind the deal, or even the price — although it is certainly expensive — but the fact there is, as Merrill Lynch puts it, an unusually long period between the deal and the end of the rights issue, which will be used to fund it.
Here’s what the bank says:
The shares are likely to remain somewhat in limbo over this period of time and it is reasonable to expect high volatility. Current investors are less likely to be buyers over this period in the knowledge that a cash call is on the way, possibly leaving the shares more vulnerable than usual to speculative interest.
Given that our pro-forma valuation of the company is dependent on the number of shares issued as part of the deal, our fair value of the company will fluctuate more than usual over the coming weeks as the Prudential share price moves. This is not the same as saying that the price of the rights matters (a common misconception, as this merely affects the bonus element of the rights), but the share price at the time of the rights issue does matter. Of course current investors will see the benefit of a higher share count, but the share issuance to AIG does mean that more value is being passed away as the Prudential share price falls, in our opinion.
And if Pru has not hedged its FX exposure it will end up having to issue even more shares.
Of course, there is another way of looking at all of this. Has the slump in the Pru share price perhaps made the life assurer vulnerable to a bid?
As we noted yesterday, that happened to NatWest when it made another transformational bid — for Legal & General — in 1999. Its shares plunged 20 per cent and that kicked off a bid battle between the Scottish banks, RBS and Bank of Scotland.
Related Links:
Fee bonanza – FT Alphaville
The Pru and the Great British Peseta – FT Alphaville
The HSBC of the insurance world (updated) – FT Alphaville
Pru agrees to buy AIA for $35.5bn – FT