Jeremy Warner's Outlook: Prudential's £1bn tilt at UK 'growth market'

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The Independent Online

For years, the life assurance industry has been lecturing about how it's not worth investing in the UK any more.

For years, the life assurance industry has been lecturing about how it's not worth investing in the UK any more. Price capping, compensation culture, oppressive prudential and sales regulation - somehow it had all become too much for an industry already laid low by the travails of the bear market. Some have packed up shop altogether and withdrawn from the market while others have chosen to invest their scarce capital resource in more hospitable places - the Continent, Asia and even America. So why on earth is Prudential raising £1bn via a rights issue primarily for the purpose of investing in, of all places, the UK?

Knee-jerk reaction in the City was that the stated purpose may have been a smokescreen for underlying solvency problems. Under the EU Financial Groups Directive, Prudential must apply a new solvency test from the beginning of next year which obliges the company to provide for the same, demanding solvency requirements in its overseas interests as it does in the UK business. Pru is left with a capital shortfall of £100m to £200m.

Of course this is only a small proportion of the rights proceeds, and the problem could have been solved by raising more debt. Even so, it is questionable whether Jonathan Bloomer, the chief executive, would have gone the rights issue route had he been able to sell his remaining stake in Egg, which even at the inflated price he wanted would have raised less than the rights. There's a suspicion of opportunism here.

Still, yesterday's cash call doesn't fall into the same category as some of the rescue rights issues launched by continental insurers in recent years. On most measures, Prudential is solvent enough. We have to take Mr Bloomer at his word when he says he wants the money to pursue UK growth opportunities. Things are still far from perfect but the environment genuinely seems to have improved in recent months. It would be nice to think that's down to the galvanising effect of the Turner report, which has helped to make people acutely aware of the inadequacy of their long-term savings.

But though this may be helping at the margin, particularly in making the Government realise what a horlicks it has made of the savings market so far, the main reason is more mundane. So much of the industry is now closed to new business - from Royal & SunAlliance to AMP and Abbey National - that if levels of activity were to return to anything remotely close to former glories, it would be a huge boost for those still left standing. The market has been forcibly consolidated, with anything up to 30 per cent of previous capacity now removed.

Depolarisation will further accentuate these trends. At least half the big high street banks will abandon the tie in favour of greater, multi-tie choice, which ought to benefit the likes of the Pru, traditionally weak in terms of banking distribution. Most independent financial advisers are also likely to go the multi-tie route, again consolidating business in the hands of a relatively small number of well-capitalised, larger players. On top of all this, the Government recently conceded that the price cap on stakeholder savings products should be raised from 1 per cent to 1.5 per cent. This may not sound very much, but for a big, efficiently run player, it may be just enough to make the products worth marketing.

None the less, investors are right to remain sceptical. It was once a mantra for Mr Bloomer that there was no need at the Pru either for a dividend cut or a rights issue. Now we've had both of them. The recent history of the savings industry gives little reason for faith in its powers of prediction. Top line growth? Maybe, but how profitable is another question. The rights are so deeply discounted that there is scarcely any chance of the issue failing - so much so that you have to wonder why Mr Bloomer is paying out £24m to underwrite the offer. Still, City reaction yesterday was so negative - as much for the surprise of the thing and the unexpected nasty of the EU solvency problem, as anything else - that Mr Bloomer is perhaps right to leave nothing to chance.

King's long haul

Justin King's business review at Sainsbury's was more interesting for what it said about the past than the future. Talk about trampling on his predecessor's grave. Sir Peter Davis couldn't have expected any mercy after the brazen and undignified way in which he stuck out for his contractual entitlements - all £3.1m of them - and certainly got none. His two main contributions to Sainsbury - the contracting out of IT to Andersen and a spanking new distribution system for this fading star of supermarket retailing - are dismissed as folly, requiring write-offs worthy of a National Audit Office investigation.

The one thing that stood between Sir Peter and an earlier execution - the payment of a decent dividend - is also shown to have been completely unaffordable. The dividend is halved. Even at its rebased level, it hardly looks sustainable. But worst of all, from his glass-fronted tower on London's Holborn, Sir Peter simply lost touch with the customer.

Mr King reckons he can get it back again. At 14 million people a week, footfall at Sainsbury is as high as it's ever been, and if it can only get the products on to the shelves at a competitive price, then in Mr King's view he will be halfway to solving the problem. Regrettably, the competition isn't likely to stand by idly and allow his "sales-led recovery" to blossom. Tesco and Asda are already in that virtuous circle of more volume equals greater efficiency equals lower prices equals higher volume. Mr King has a mountain to climb in getting there.

To achieve the planned improvement in sales, Sainsbury is being forced to take the axe to margins. Pre-tax profits this year and next will as a consequence be less than half last year's level of £529m. The house broker, UBS, has forecast only £300m for the year after. Yet to justify the present "recovery stock" rating enjoyed by the shares, the company eventually has to return to former levels of profit. There's no margin for error. Mr King is asking for the familiar three-year timeframe to achieve his turnaround. The strategy outlined yesterday doesn't seem to carry him past the salvage stage. His goal of recreating Sainsbury in its old image - high quality food at competitive prices - may already be out of his reach.

Tesco will make £2bn this year and even more the year after. That's more money for price cutting, store improvements, and expanding the product range. Mr King says he doesn't want to take on Tesco, yet it was taking on Sainsbury which in the early 1990s provided Tesco with the competitive will it needed to succeed. Complacency and arrogance are what finished off Sainsbury, allowing Tesco to overtake.

There are few signs of those character flaws creeping in at Tesco, nor is there any sign of Tesco's chief executive, Sir Terry Leahy, giving Sainsbury the leeway it needs to find a sustainable niche. Sainsbury's substantial property assets remain the core support for the share price, yet there is nothing else you can do with a supermarket apart from, er, run it as a supermarket. Some of those City estimates of Sainsbury's property worth may be just wishful thinking too.

Pension charity

What world does Alan Johnson, the new Secretary of State for Work and Pensions, live in? At a CBI pensions conference yesterday he ruled out the idea of a compulsory levy on employers to support the Government's Financial Assistance Scheme for paying the pensions of workers in companies that have become insolvent - for which thanks for nothing, as any such levy would be a new tax.

Yet in all seriousness, he went on to urge CBI members to make a voluntary contribution. Why on earth would they do that? Companies are not in the business of charity or paying off the liabilities of competitors that become insolvent. To do so would arguably be a breach of fiduciary duty to shareholders. No wonder the Government's pensions policy is such a mess. If this is typical of the standard of government thinking on these matters, then Lord help us.

jeremy.warner@independent.co.uk

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