PRUDENTIAL exposed the risks and upsides of its $35.5bn (£24bn) move on AIG’s Asian network in more detail as its prospectus finally emerged yesterday.
The 936-page document, which was pored over by analysts and investors, re-stated Prudential’s punchy promise to more than double its new business profit from the Far East by 2013 while returning a steady flow of dividends to the west. It revealed the bulk of the predicted $370m annual cost savings would come from “people”. Staff cuts will save $140m a year.
More importantly, the prospectus indicated the merger of Prudential and AIA would not be earnings enhancing by 2013 as previously indicated, because of the cost of re-jigging the financing of the deal to satisfy the Financial Services Authority.
Investors were concerned by the disclosure that Prudential will inherit $7.4bn of Thai sovereign debt as part of the deal. Bangkok has been shaken by deadly anti-government riots this week and the cost of insuring the country’s debt against default has shot up to its highest level in more than a year.
In its document, Prudential said investing in such instruments “creates exposure to the direct or indirect consequences of political, social or economic changes” in the relevant countries. Paul Mumford, who holds Prudential shares at Cavendish Asset Management, said the level of the exposure to Thailand – 11 per cent of AIA’s investment portfolio – illustrated the potential nasty surprises that could be inherited by Prudential through the merger.
Another section that caused shareholders to raise their eyebrows was a “get out clause” that will allow senior Prudential figures to avoid taking up all their rights. Chief executive Tidjane Thiam and other directors will be able to sell some of the rights attached to their shares rather than exercising them. Thiam would have to spend £1.5m to take up his rights based on his holdings while Michal McLintock, head of Prudential’s fund management arm M&G, would have to spend £3.4m.
However, the prospectus clarified that no board directors would see their pay or bonuses go up as a result of the deal going through.
The rights issue tome met with mixed reaction from analysts. While Charles Stanley put out a favourable note, Barrie Cornes of Panmure Gordon said: “We recommend that investors vote against the deal, and on this basis we maintain our “buy” recommendation, given that we would expect the share price to rally given such a vote.”