Counting the cost of a Prudential Asia sale
News that China’s Ping An Group is mulling a bid for Prudential's operations in Asia has had tongues wagging over the past few days.
Some investors clearly see such a deal as a credible possibility. The London-listed insurer’s share price jumped by as much as 5% on Wednesday and Thursday when news of the potential merger spread, before paring those gains on Friday as stock markets globally sank.
Yet any takeover appears far from certain. Indeed, a spokesman for Prudential told AsianInvestor last week that it had received no formal offer and embarked on no discussions.
Prudential announced in March that it plans to demerge its UK and European operations from the rest of the business. Since then it has been an assumption among many in the industry, including Prudential staff and bankers in Hong Kong, that a buyer will come in for some or all of the firm's Asian business, an executive familiar with Prudential said.
But Ping An is not the only name in the frame. Not long ago German group Allianz was seen as the likely acquirer, and other companies have also been mentioned. Another possibility mooted by AsianInvestor sources would see a large international player buy most of Prudential Corporation Asia (PCA), with Ping An taking over only the Hong Kong business.
"The speculation around Ping An considering Prudential's Asia business looks unlikely," he said, noting that Ping An's share-price valuation is much lower than what it probably would have to pay for PCA. That would make such a deal earnings-dilutive for the Chinese firm.
"However, we would never say never," Musaddi added, "as some acquisitions are done for strategic reasons and less for financial reasons."
BUYING DIVERSITY
It's easy to see why Ping An would be tempted by Prudential's Asia assets. PCA seems a good fit for its ambitions to expand beyond its China, as evidenced by a concerted buildout in Hong Kong in the past year or so.
The most likely motivation for Prudential to sell its fast-growing business in Asia, on the other hand, would be the prospect of a big financial reward for its shareholders.
“It makes perfect sense for Ping An but the benefits are less obvious for Pru,” said a Singapore-based insurance industry consultant on condition on anonymity. “This would be a complex acquisition as a result and not one that would be cheap, given the growth prospects of Pru in Asia.”
Several analyst reports have highlighted that a sale of PCA would be the best option for shareholders – with a share price premium of 30% to 50% being mentioned – noted the source familiar with Prudential.
The key incentive for Ping An would be the extra geographic diversity it would offer both the asset and liability sides of its business. As the unnamed consultant put it: “It’s a globalisation strategy delivered in one go.”
Ping An is huge; it reported Rmb335.85 billion ($49 billion) in revenues and Rmb28.2 billion in operating profit (of which life and health insurance made up Rmb16.4 billion) for the first three months of the year, based on Rmb6.7 trillion in assets. But the business is heavily orientated towards its home market.
Chinese insures can invest up to 15% of their portfolios offshore, but Ping An reportedly has less than 5% of its capital in foreign assets. Acquiring PCA would immediately give it more geographic diversity through a business that’s growing healthily in multiple markets.
Prudential’s Asian operations do not rival those of Ping An for pure scale, but they aren’t to be sniffed at. The business has assets of around £70 billion ($90 billion), Stephan van Vliet, chief investment officer for PCA, told AsianInvestor last week.
It is growing quickly too; the company reported in early August that PCA enjoyed a pre-tax first-half operating profit of £1.02 billion ($1.3 billion). That is 7% more than in the year-ago period (and 14% higher assuming a constant exchange rate).
Bringing in Ping An would benefit PCA's $182 billion AUM regional fund management arm, Singapore-based Eastspring Investments, the consultant told AsianInvestor.
Ping An could pump more of its home-grown assets into these various funds, while Eastspring’s experience would help the Chinese firm round out products it could sell locally. And having a major Chinese owner in the form of Ping An would likely turbo-charge Eastspring’s ambitions to penetrate the mainland via its planned onshore entity.
From a broader perspective, a successful deal would be positive for China’s commercial and strategic interests, suggested the consultant. Big Chinese takeovers of US companies are being blocked, so if Ping An were to acquire a large business from a UK group and integrate it successfully, it might open the door to more such deals, he argued.
PRUDENTIAL’S PURPOSE?
Nonetheless, it’s harder to see what Prudential would get out of a deal, beyond an immediate boost to its profits.
The firm has gone to great lengths to flag the growth potential of its Asian operations. PCA chief executive Nic Nicandrou told AsianInvestor in May that lumping together its operations in Asia, Africa and US and spinning off the UK business made strategic sense.
To suddenly divest itself of one of the group's crown jewels – perhaps the brightest – would mean ripping up the demerger it’s been targeting for two years. It would be hard to envisage Prudential continuing with the plan after selling its Asian business, and ending up with an operation that comprised only its US and African operations.
A Ping An takeover would in addition force the unwinding of the Citic-Prudential Life joint-venture, unless Ping An also opted to buy Citic out of the Guangzhou-based business.
Certainly, if it were to succeed in any bid, Ping An would likely have to offer an eye-watering amount of money. Prudential as a whole had a price-to-book value of 3.05 times based on its last full fiscal year’s earnings.
“No one can put a number on the potential growth of the Asian insurance market – and when you can’t do that, the seller has to aim high,” the unnamed consultant said.
If Ping An offered enough money, Prudential's shareholders would likely agree to sell. But such a decision would likely have adverse consequences for the group's future prospects.
Today, Prudential is well placed to benefit from Asia's rapid economic expansion and growing middle class. But it would risk missing out on that for decades to come if its shareholders placed short-term greed over long-term strategy.
Alison Tudor-Ackroyd also contributed to this story.
The article has been updated as of 3pm Hong Kong time on August 13 to correct the AUM figure for Prudential Corporation Asia and include the AUM figure for Eastspring Investments.