Not before time…
Prudential – finally and at long last – announced its much delayed $20bn rights issue on Monday morning (UK time), allowing Tidjane Thiam, chief executive, “to make the financial case for Pru’s $35.5bn takeover” of AIA, the Asian arm of US insurer AIG.
Pru shares have slipped 16p since the issue was delayed earlier in the month and closed on Friday at 542.5p. Accordingly, the UK life assurer has improved the terms of its rights issue from those outlined nearly a fortnight ago, (that is, four new shares for each share they already own, at 135p-140p a share) and is now offering 11 rights shares for 2 existing shares at an issue price of 104p per share, a little over a 39 per cent discount to the May 14 closing price.
Interestingly, Pru and its advisers had said on Sunday night that they “wanted to watch the Asian markets open on Monday before fully committing to the launch”, according to an earlier FT report.
Curious, then, that even though Asian stocks suffered their steepest fall in six months on Monday, Pru is steaming ahead with the issue, as per its trading update – see the statement here and here.
Unsurprisingly, Pru has also some ambitious new targets this morning, according to JPMorgan.
(a) Target to double Asian new business profit to £2.8bn (pre-tax) by 2013; (b) target to at least double Asian IFRS operating earnings to over £3.2bn in 2013;; (c) $1bn per annum of cash up-streamed from AIA from 2011; (d) $800mn of EV new business profit synergies by 2013 (previous indication $700mn) and also $370mn of IFRS cost synergies ($340mn previously). The IFRS and cash targets are consistent with our analysis in our last research note, the EV targets are a small upgrade.
In terms of detail, JPM notes:
… this higher level of surplus compared with the previous announcement (approx. £3bn) reflects: (a) an agreement with the FSA that in light of current market conditions that the Group will maintain its group capital resources equal to at least 150% of the IGD requirement [the 2001 Insurance Groups Directive, under which group solvency is calculated by aggregating the surplus capital held in the regulated subsidiaries, then deducting group borrowings] post certain stressed circumstance occurring; and (b) that £1.1bn of the AIA capital base is not fungible (i.e. therefore is not included in the forecast combined IGD surplus).
The debt-financing arrangements to fund the deal have been revised to include a facility for $5.4bn of hybrid capital – previously this was senior debt, as JPM notes. In addition, a contingent subordinated debt facility of £1bn put in place to enhance IGD capital should it be needed in certain stress scenarios.
There is also some news on disposals in today’s statement. The Indian business of Pru will be sold to its joint venture partner Tata on completion, while in Malaysia the Pru will bring in a minority stake holder. In China, the Pru will sell half of AIA’s unique 100 per cent owned license, but the legal structure of the group means this will take some time, according to Thiam.
Panmure Gordon says the headline figures are “pretty much as anticipated”.
As well flagged in the press, the debt financing arrangements have been amended (from Senior debt) to include $5.4bn of hybrid debt. In addition there is a standby facility from AIG to subscribe for up to $1.875bn of hybrid capital (to help support the IGD position – FSA issue now addressed). The additional cost of moving from Senior to hybrid debt looks like it will be offset by sales of ‘surplus’ operations such as AIA India that is expected to be sold at the time of the deal completes (still expected to be on for
Q3 2009). No real surprises here.
As for the new targets:
There are some quite punchy targets released to help support the case for the deal. These include an annulaised new business profit revenue synergies of $800m pre tax and cost synergies of $370m ($340m previously). The combined Asian business is being targeted to achieve IFRS pre tax operating profit of at least £3.26bn in 2013 and to more than double combined EEV pre tax new business profit to at least £2.8bn in 2013. There is also a target of remitting at least $1bn /year from AIA from 2011 onwards. Regulatory capital hurdles appear to have been met and the combined group should have
an IGD surplus of £5.2bn. as flagged in the press there will be a £1bn ($1.875bn)
Panmure Gordon”s conclusion:
We are comfortable with our Buy recommendation. We believe that there is and has always been a strong strategic logic to the deal with only the price and execution being our concern. It is very early to form a cast iron view but we believe that either the proposed deal will fail to achieve the required 75% hurdle rate and the shares will bounce or investors will take comfort from improving economics (despite the recent banana skins) and the shares will rally. With the caveat over the price being paid (which we believe will look less unattractive as time goes on) and the integration/execution risk we believe that there is very little downside risk in the share price with the shares currently trading at a 14% discount to our 2010F Embedded Value.
The 900-plus page prospectus for the issue will be issued at 9.30am BST, so you can decide for yourself.
Related links:
Prudential/AIA – Lex