Breakingviews: Prudential’s U.S. listing throws spotlight on Asia

Mike Wells is taking a second step to breaking up Prudential. The chief executive of the $37 billion British insurer on Wednesday announced plans to list part of its U.S. unit, Jackson National Life Insurance. That should partially satisfy activist investor Dan Loeb, who called for a full split last month. With reduced exposure to America, Wells will have to come up with a plan to demonstrate the value of the larger Asian business.

Pru can reasonably claim a breakup was already in the works. After last year spinning off the company’s $6 billion UK and European business, M&G, Wells said he was considering all options for the rest of the company. Still, Loeb’s intervention may have accelerated decisions. The activist, whose Third Point hedge fund last month disclosed a 5% stake, argues that Pru’s complex structure undervalues its Asian business. He also believes a split could save 200 million pounds of annual costs.

A partial sale of Jackson is a good place to start. Panmure Gordon analysts reckon the business could earn $2.9 billion in operating income this year. After deducting half of Pru’s $300 million net interest bill, half of the company’s $412 million of central overheads, and tax at 16%, its net income would be $2.1 billion, according to Breakingviews calculations. Using the same 3.4 forward earnings multiple as listed rivals Equitable Holdings and Lincoln National, Jackson is worth around $7 billion.

At Pru’s current market value, that implies that the company’s much larger Asian unit is worth almost $29 billion. That’s just 11 times this year’s expected earnings – after deducting the division’s share of Pru’s net interest and corporate costs and applying a 14% tax rate. Larger rival AIA trades on 17 times forward earnings, according to Refinitiv.

If Pru’s Asian business were valued like AIA’s and a breakup enabled the company to halve its central overheads, Pru shares would be worth around 16.50 pounds, according to Breakingviews calculations – almost 50% more than today.

Investors won’t give Pru the immediate benefit, though. Asian insurers are under strain from the slump caused by the coronavirus outbreak in China. Pru’s 14% increase in operating income in the region last year is evidence of its longer-term growth prospects. But unlocking value through a breakup will take time.

_____________________________________________________________________

Request a free trial of Breakingviews here