Cheer up, Prudential. Tomorrow’s another day, even if your ‘transformational’ bid for AIA has blown up and your chief executive is looking ready for the chop.
So let’s look at the case for moving swiftly on.
First, dealing with the merger’s break-up costs. As Panmure Gordon’s Barrie Cornes noted on Wednesday, they’re steep, but (somewhat incredibly) not as bad as they could have been:
The total costs of the transaction are estimated to be c£450m including the break fee of £152.6m and arrangement and underwriting fees of c£81m. The balance represents costs of advisory and other fees including the net cost of the currency hedging (£500m per page 888 of the prospectus – you couldn’t make it up). We estimate that the strengthening of the US$ has helped reduce the financial impact by c£284m.
The Daily Telegraph adds that Pru may even have made a tidy sum from these currency positions, too. Which will help with the bills, presumably.
Meanwhile, looking ahead to when the dust has settled, Asian plenty looms large according to Cornes:
Where now? – We think that the company has a sound independent future as a stand alone business and concur with comments concerning growth levels in the Asian business. Moreover we think that a separate listing of the Asian operation could realise significant upside for existing shareholders.
Ah yes — the ‘position of strength’ to which Pru CEO Tidjane Thiam referred in the announcement ending the AIG talks.
At the very least, Panmure base their view on applying a 13x new business multiple to the Asian operations, similar to what was suggested by the size of the bid for AIA, suggesting a valuation of around £12.6bn. (Pru’s current market cap is £14.6bn.)
________________________
Pulled-apart Pru?
At any rate, surely Pru’s Asian prospects are just music to the ears of any buyers waiting to pounce, right? Well, Cornes says:
Break up – Although we have a 955p break up valuation on Prudential we do not think that Pru is an immediate break up candidate given the current investment markets. In addition although it may have a couple of ready buyers in the wings, the UK operation is likely to stay within the group in the short term as it drives cash flow for the growth business in Asia.
Wait and see, then. Or perhaps not, as Oriel Securities’ Marcus Barnard argues:
We do not believe the company now becomes a bid or break up target. We see no reason to break the company up and we doubt that any acquirer has the resources to make a successful bid.
In terms of valuation, we believed the shares looked expensive at 600p prior to the deal and with the subsequent falls in markets they still look expensive. Prudential is a geared play on equity markets and with the 10% fall in markets and the costs associated with the deal, then without a bid the shares should be trading nearer to 500p than 600p. Lack of leadership creates uncertainty. Prudential is a difficult company to manage with the needs to balance excess cash generation in the UK with opportunities to reinvest cash into Asia and other parts of the business.
(H/T Bryce Elder)
Lack of leadership? Say it ain’t so, Tidjane. If you’re still there, that is.
Related links:
Famous last words – FT Alphaville
Investor democracy kills unpopular Pru move – Lombard / FT
Back to Basics for Man From the Pru – WSJ