Dan Loeb has found a soft target in Prudential. The outspoken founder of hedge fund Third Point has taken a near 5% stake in the $47 billion insurer and called for it to separate its U.S. and Asian operations. The idea makes sense and, given the likely upside, Loeb won’t have to shout too loudly.
Loeb pulled no punches in his letter to Prudential’s board, published on Monday evening. He lambasted the firm’s lowly valuation versus peers, which is partly due to its unusual structure. The U.S. retirement business, known as Jackson National Life Insurance, is complex and detracts from the faster-growing Asian life operations. Loeb also criticised Pru’s generous dividend policy, which he says has held back the Asian unit, and the UK head office’s flabby costs. A separation could eliminate some 200 million pounds of annual expenses, Loeb reckons.
The case for a breakup is easy enough to make. Prudential’s Asian business will make nearly $3.7 billion of net income in 2020, according to Panmure Gordon. On the group’s existing 10 times earnings multiple, the unit is worth $37 billion. But as a solo operation it could one day be valued like its Asian peer AIA Group, currently trading at a lofty 17 times, according to Refinitiv. On that multiple, the Asian division could be worth $62 billion, far more than Prudential’s current market capitalisation of $47 billion.
Loeb is kicking on an open door. Chief Executive Mike Wells has already proven he has the stomach for deep surgery, having last year spun off the UK and European insurance and asset management business, called M&G. That always looked like a precursor to a bigger deal, given Prudential’s somewhat haphazard business mix. Some UK investors may worry that splitting the group and listing the parts separately in Asia and the United States could jeopardize their precious dividends, or make it harder for them to remain owners. Yet, given the potential reward, they will likely go along for the ride.
_____________________________________________________________________
Request a free trial of Breakingviews here
