Shareholders in life insurance behemoth Prudential (PRU) will have their holding split into two separately-listed companies, both potentially qualifying for the FTSE 100 index.
Prudential is to demerge its UK operations and list them as M&G Prudential. Its remaining business will contain its faster growth US and Asian operations.
The demerger may not happen until late 2019 or early 2020 as Prudential first needs to undertake some legal paperwork.
‘The M&G Prudential demerger in our view merits a halving of the conglomerate discount (c.15% at today’s opening on our calculations),’ says Mark Cathcart, analyst at investment bank Jefferies.
‘There is also the value release potential from the exit of £34bn of UK annuity assets to consider, with redeployment possibly leading to an additional 5% value release over time.’
Coinciding with the demerger announcement is news that Prudential is releasing £1.1bn of capital from reinsuring £12bn of UK annuity assets with Rothesay Life. ‘This suggests total capital release potential of c£3.3bn assuming that the entire £34bn UK annuity portfolio is eventually divested,’ comments Cathcart.
Mike Wells, group chief executive of Prudential, says following separation, M&G Prudential will have more control over its business strategy and capital allocation.
The company says M&G Prudential will be an ‘independent, capital-efficient UK & Europe savings and investment provider’, headquartered and premium-listed in London. Prudential will also keep its existing listing on the London Stock Exchange.
Group debt will be rebalanced across the entities and will involve debt redemption and new issuance.
‘One may assume the UK interests (M&G Prudential) will be less appealing to investors as the non-UK interests have experienced faster growth,’ says Russ Mould, investment director at AJ Bell. ‘However, history suggests the demerged component of a business can still do well on the stock market.
‘A study in 2003 by the Krannert School of Management found that subsidiaries spun out of companies outperformed their former parent by more than 20% over the first three years following the demerger; with most of the excess returns within the first 12 months of trading.’
Arjan van Veen, analyst at investment bank UBS, says the rationale for the demerger allows both entities to focus on different strategic priorities ‘and importantly, in our view, the non-European entity will not be subject to Solvency II [European Commission directive targeting insurers]’.
Also published today are the company’s full year results which in line with market expectations. Operating profit was up 10% to £4.7bn and new business sales improved 6%.
