I cannot feel any enthusiasm for Prudential’s acquisition of the Asian assets of American insurance giant AIG.
You cannot fault the Pru in terms of global ambition but then the same could be said about Fred Goodwin and the Royal Bank of Scotland’s acquisition of ABN Amro. Nor is the basic strategy faulty. Those companies such as AIG that greatly overstretched themselves in the good times may have valuable assets that they are forced to sell in order to repair their balance sheets.
The point is that forced sellers are in no position to haggle over price, as Barclays demonstrated when it picked up assets from Lehman Brothers assets. Prudential is paying a very full price for what are undoubtedly useful assets. Instead of greatly enhancing its own position at the expense of stricken rival, it looks to be putting its wellbeing at risk.
No wonder the Prudential share price fell 20% in two days. While that means any investor can now buy in at a much lower level, there is the small matter of a £14 billion rights issue to help fund as well.
Even the biggest rights issue in UK stock market history is insufficient to cover the £26.6 billion deal, so $5 billion of debt, about £3.5 billion, will be run up just as interest rates start to rise.
It’s all rather frightening, especially as the pound has fallen heavily against the dollar since the deal was announced. The rights issue will be even more expensive in sterling terms as a result.
Furthermore, the rights issue, being so massive, will have to be priced at a deep discount to the current share price in order to tempt investors to take part. Any fall in the share price will tend to push down the rights price, and the lower the rights price the more shares Pru will have to offer to raise the cash. It is potentially a vicious cycle.
Hedge funds are reported to be short-selling Pru shares. Don’t blame the share price fall on them. They are simply taking advantage of an existing situation, not creating it. They believe, quite reasonably, that a large proportion of Pru shares will be left with underwriters and that these will be going cheap as the underwriters reduce their positions. Thus the short sellers will buy back at a cheaper price than they sold at and will pocket the difference.
Do not put any store by suggestions that short sellers will be denied access to the rump of the rights issue. Pru and its advisers will not be in any position to turn away buyers.
There are other worries. When this deal was announced we got the impression that large institutional shareholders supported it. Now it appears that they are having doubts, and not a moment too soon. All the costs are incurred now while the supposed benefits are years down the line.
Apart from the disastrous international ambitions of RBS, another unfortunate takeover deal springs to mind. Remember the transforming deal of a lifetime that Lloyds struck in buying HBOS? It certainly did transform Lloyds, though not in the way that was intended.
All in all, I feel no desire to try to pick up Pru shares on the cheap. I just wish that Prudential had made more effort to get AIG’s assets more cheaply.
No news is good news
The Bank of England has, as expected, kept interest rates and quantitative easing on hold. Just two more such decisions to go to the general election and then we can get down to business.
On the economic front, it has been instructive to see the hand wringing and political name calling that accompanied the sharp fall in sterling earlier this week. What happened to all those arguments that a weak pound was good for exports and was therefore to be welcomed?
It is a recurring theme of this column that a weak currency is a symptom, not a cure. Perhaps a few more people will come round to this view as the prospect of a hung parliament spooks the currency traders.
Eric Varlet
Thanks to those readers who emailed to point out that I had mistakenly called the Barclays boss Eric Varley instead of John Varley last week. One reader struck home by calling me Rodney Dobson, which rather made the point of being careful with people’s names.
I can only plead that bankers look alike and it was therefore understandable that I amalgamated Eric Daniels of Lloyds and John Varley of Barclays.
One further point arising out of the issue of waived bonuses. It is quite clear from comments made after the Lloyds results were announced that the bank thinks it is perfectly alright to pay the chief executive a bonus even if the bank makes a loss. This is quite outrageous and when Lloyds holds its annual meeting shareholders should show their disgust by voting against all resolutions. I will remind shareholders of this when the time comes.
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