Prudential revolt gains momentum

The life insurer faces a battle to convince sceptical shareholders of the merit of the AIA takeover, reports James Moore
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The Independent Online

Prudential endured another bruising day yesterday with further signs that the shareholder revolt against its $35.5bn takeover of Asian insurer AIA is gathering momentum. Just a day after it appeared that the life insurer had more or less stitched up a deal with the Financial Services Authority to enable it to price its planned £14bn rights issue, both Standard Life and Neptune added to the company's difficulties.

In a BBC interview Euan Stirling, investment director at Standard Life Investments (SLI), got the ball rolling when he said: "When they announced the deal it seemed quite an expensive way to proceed to us and it does look as if that price has just gone up, despite the fact that markets have fallen recently. So it looks as if the Prudential, in order to get their regulator's approval, is going to have to raise more expensive debt and is also going to have to put together a recovery fund in the event that there is some market calamity. So it appears that the price for their proposal to buy AIA, their Asian rival, has gone up substantially but, again, we need to digest the details as they come out this morning."

As if that wasn't bad enough, Neptune Investment Management, which appears to have assumed the role of dissident-in-chief, announced the formation of a shareholder action group in a bid to rally opposition to the deal among smaller shareholders. Robin Geffen, its founder and chief executive, is fronting the campaign which went live with its own website and call centre yesterday. The aim is to gather sufficient support to trigger a confidence vote in the deal's architect, Prudential's chief executive Tidjane Thiam, at the forthcoming general meeting to green-light the takeover.

Mr Geffen, who was also a vocal critic of House of Fraser's takeover by the Icelandic group Bauger in 2006 and of Kraft's hostile bid for Cadbury, insisted yesterday that he does not want to be seen as a "headbanger" in the City. But he says that he has acted because the Prudential's bid is bad news for shareholders – bad news that has got worse, with the FSA deal likely to involve the company putting aside £1bn into an emergency fund to protect it in the event that the global economy goes into another tailspin, together with the need to raise expensive junior debt that may force the sell-off of the UK arm, the US arm, or both. Which means this one-time favourite of incoming seeking investors won't be paying a dividend for a long time.

"What shareholders are being asked to do is back the transformation of this old, long-established company into something very different from what they bought into," Mr Geffen said. "We are being asked to give up the crown jewels for an Asian business which doesn't even have a significant presence in India or China."

Mr Geffen added that the action group would provide a voice for smaller shareholders, forcing the company to pay attention to investors outside "the magic circle of the top 20 fund managers". Can he make his voice heard or will this be another case where the interests of smaller shareholders are trampled on? Prudential would only say yesterday: "We believe the enlarged group will be in a position to capture sustainable and highly profitable growth, as well as delivering long-term value for our shareholders."

But it clearly has a problem on its hands. It needs a "super majority" of 75 per cent of its shareholders to back the deal, and its shareholders are a very diverse bunch. At the top of the tree is Capital, the US fund manager which has reportedly expressed doubts about the transaction. Capital has three funds, two of which are investors in Pru with each holding about 6 per cent of the shares. It is conceivable that they will vote against each other when the time comes, and it is understood that neither has made a firm decision on which way to go.

Including the 12.04 per cent held by Capital's funds, the remainder of the Top 10 hold, between them, only just over a third of the shares. While the company claims to have "consulted widely" prior to launching the deal, there are several shareholders who privately say that it "must do better" if it is to win their support.

Several analysts, including James Chappell of Olivetree Securities, have already questioned whether Mr Thiam will be able to survive the deal's failure. But Prudential is hoping that its prospectus and a road show after the rights issue pricing – likely to be at the end of the week, assuming the Financial Services Authority is happier about the situation than it was last week when it blocked the plan – will be enough to convince the doubters.

Much of the City has a vested interest in the deal going ahead – underwriting fees alone will realise $630m from the more than 30 banks that are participating in the rights issue. And Pru's shareholders will have to wear a £150m penalty from break fees if the deal fails (another reason why Mr Thiam is unlikely to survive if his gamble fails to pay off). At the moment, the tide is not running in his favour. City bookie David Buik, who's seen a takeover or two in his time, rates Prudential's chances of pulling a rabbit out of its hat at 5-2. So the odds favour the dissidents.

What the deal means for shareholders

*It's rare for retail shareholders to receive anything other than short shrift from big companies who spend most of their time and energy courting the top 10 or 15 names on their shareholder registers. But with Prudential needing a 75 per cent majority in favour of its $35.5bn takeover of Asian insurer AIA – and with larger shareholders beginning to voice doubts – it needs every vote it can get.

So what does the deal mean for smaller shareholders? First off, they will be asked to cough up for new shares, although these are likely to be cheap to buy compared with the prevailing share price – the discount is widely expected to come in at around 40 per cent (Prudential yesterday closed at 554p, +11p). With Prudential's total market capitalisation standing at less than £14bn, shareholders who don't take up their rights face their investments being significantly diluted – the rights issue is likely to see nearly 1.5 new shares issued for every existing share.

After the deal goes through, around 80 per cent of Prudential's new business will come from Asia. This means Prudential will convert from being a company that pays a healthy income through its dividend – 20p a share last year – to one which is focused on growth. Life insurers require a large amount of capital to write new business, so it is highly likely that going forward Prudential's dividend will be cut sharply, if it pays one at all.

Investors are also likely to see Prudential changing the currency it reports results in from sterling, to dollars. And when it does start paying dividends again, they too are almost certain to be paid in dollars. This is standard practice for companies who derive most of their earnings from Asia – HSBC, for example.

While Prudential will still, initially, be based in London, this may change in time, with the company likely to move its headquarters nearer to where it makes most of its money (and, perhaps to take advantage of lower taxes). Shareholders may find that they end up paying a high price for a rights issue that funds the Pru's exit from the UK.