Margareta Pagano: AIA deal: The Pru can pull it off if the price is right
If Thiam strikes a bargain, he could yet get green light
Sunday 30 May 2010
If the Prudential's Tidjane Thiam can persuade the US Treasury to cut the price of AIG's Asian business, AIA, then my money is on him getting investor approval at next Monday's crucial vote.
But if Thiam can't get the Americans to climb down on the $35bn price tag – the value agreed back in March – then all bets are off and the deal is likely to collapse, even before it gets to a vote. All the signs are that the Treasury wants to get AIA off its books and may well be prepared to slash up to $5bn off the price tag. At that price, the Pru's more rebellious investors are likely to come off the fence and give Thiam the 75 per cent approval he needs to get the deal through.
With the stock markets so jittery, US officials are unlikely to want to scupper the deal and risk floating AIA at this stage – as it may be tough to get anywhere near the $30bn it is now considering – even if it is less money back to the US taxpayers. You can see why both sides want this deal to go through; stock markets are down between 10 and 15 per cent since the deal was first negotiated, with flotations being pulled from capitals all over, as fears of a eurozone crisis continue to undermine confidence.
It's also easy to see why Thiam's deal has attracted so much criticism. The Pru is a high-income dividend stock and a mainstay for many portfolios, so fears over dilution from the $21bn rights issue, as well as lower dividends in the short term, were valid. Investors claim Thiam is paying too much, as well as gearing up too much, with many likening the deal to Sir Fred Goodwin's bid for ABN Amro and Time Warner's merger with AOL, two disastrous takeovers.
Both these comparisons are far-fetched. Strategically, the rationale for the Pru buying AIA's businesses in Hong Kong and Singapore is to put them together with its own, and to use its distribution network for new and better products, thus creating a serious competitor in the high-growth Asian markets; a sort of HSBC for insurance. There is commercial logic to this, rather than the more egocentric RBS and Time Warner deals, where size was what counted.
While most investors bought this strategic argument, they still thought the price and the leverage outweighed the benefits. If the Pru gets the price down, then the debt proportion declines, making it much more attractive. Thus the return on capital, perhaps a better measure than earnings per share because of the sheer size of the cash call, would also be higher than the forecast 9 per cent by 2013.
In many ways, this is the right deal at the wrong time. Ironically, though, it may be that the collapse of the market now works to Thiam's favour if it gets the price down. What happens to Thiam if he can't close negotiations and the deal collapses? He's already threatened to walk if he doesn't get the necessary approval. Investors should resist his attempts to resign, and take a more nuanced approach.
Thiam stuck his neck on the block by taking such a big gamble, while investors have stuck their own necks on the block by taking him to task. That should make it quits.
Where that leads the Man from the Pru is another matter.
Profits fast at Tiffany's: Austerity fails to dim luxury's appeal
One of the more extraordinary things about our supposedly austere times is the resilience of the luxury goods markets, as shown again by Tiffany, the upmarket jeweller, which posted glittering first-quarter earnings last week to the end of April. Sales were up by 22 per cent to $633.6m, with net earnings higher by 135 per cent to $64m. Tiffany is a hit with the Chinese; sales there were up a remarkable 50 per cent to $122m and a third store was opened in Shanghai, bringing the total in China to 11. It looks as if today's Holly Golightlys are buying real baubles rather than the cheap Cracker Jack ring which the original Holly took to be engraved at the New York jeweller, making it so famous. But Tiffany's boss, Michael Kowalski, is the last to take his luck for granted, warning of "global uncertainties" ahead.
Putting all prejudice aside – raising CGT for the thrifty is not the way to go
It's a pity that the row over government plans to raise Capital Gains Tax is fronted by politicians who personify – rightly or wrongly – the worst prejudices about the Tory right. John Redwood and David Davis are correct to try to stop the CGT hike, but their involvement means the debate is portrayed as a fight between the "extreme right-wing and those who claim to be on the side of the angels, citing "fairness" as a defence.
But there's no fairness in taxing capital gains at income-tax rates of 40 per cent, because the worst hit will be hard-working middle-incomers who have saved and invested. The Government says it will exclude businesses but the hike will hit sole traders and others who invest in employee share schemes. Does the Government really want to penalise people who make equity investments when the alternatives – such as pensions – are so appalling?
Redwood and Davis say the tax hike betrays the manifesto. They are right. And it's staggering that the Lib Dems persuaded David Cameron and George Osborne to accept such a policy shift. One can only assume they didn't think it through, or were desperate for a deal. Or both. Defending the rise as the only way to pay for a £10,000 threshold is not good enough.
Ironically, it's a hike which will hit working classes even more than those in the middle – they are already broke – and the Business Secretary, Vince Cable, is wrong to say it won't. It's not up to politicians to decide which class people are in, or whether they should have second homes. If politicians – most of whom do have second homes – want to cool the housing market, or get the super-rich private-equity guys, there are other ways. But raising CGT for the thrifty is not the route: it's neither liberal nor conservative – more statist.
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