Prudential to split firm in two by spinning off Britain operations

Bloomberg

Prudential Plc soared on plans to split the firm by spinning off its UK operations, a move that will create an insurance business focussed on faster-growth markets in Asia, Africa and
the US.
Investors will receive shares in M&G Prudential, formed in 2017 through the combination of its UK asset-management business with European insurance assets. Both firms are likely to be included in the benchmark FTSE 100 Index of the UK’s biggest companies. Ahead of the demerger, Britain’s largest insurer will also sell 12 billion pounds ($16.7 billion) of annuities to Rothesay Life.
Prudential, which derives about a third of its earnings from Asia, is benefiting from an expanding middle class and growing insurance coverage in the region. The UK business, led by John Foley, will have more control over its strategy and capital as a standalone company. It will also be able to play a greater role in developing long-term savings products, Chief Executive Officer Mike Wells said.
“The new M&G Prudential has much stronger prospects and the separation has the capability to unlock quite a large amount of value for shareholders,” said Berenberg analyst Trevor Moss, who estimates the company could be worth as much as
15 billion pounds. “The UK business valuation has suffered as a consequence of being a small part of the sum of the parts and being a low-growth business in recent years.”
Prudential climbed as much as 6.4 percent in London trading, the biggest gain since November 2016, and was up 4.9 percent at 1,915 pence. That gave the firm a market value of almost 50 billion pounds.

Looking East
The spin off of the European operations has been an option considered by Prudential management for several years. It comes as household wealth in Asia is predicted to rise from $53 trillion to $78 trillion over the next five years, creating opportunities for asset managers and insurers to sell products. The parent company will remain headquartered in London and retain its other listings.
The timing of the demerger is subject to a number of factors including the completion of the sale of annuities to Rothesay. Rothesay, backed by Blackstone Group LP, was in pole position to buy the annuities.
The sale is part of a strategy to make the company more capital light as insurers look to exit that type of business to free up money for share buybacks, debt repayment or acquisitions.
Following the annuities sale, “management is retaining all potential capital release to support the demerger, which in our view would be disappointing as the market was expecting a special dividend out of that,” JPMorgan Chase & Co. analysts Ashik Musaddi and Kunal Zaveri wrote. M&G Prudential remains on track to deliver an earlier plan for 145 million pounds of annual cost savings by 2022. Assets under management at M&G Prudential rose 13 percent to 351 billion pounds in 2017 after record net inflows from external managers.
“There’s a lot more they can do in the market,” Wells said in a call on Wednesday, referring to M&G Prudential. “As far as what more the group can do for them, I think it’s a harder question. They’ve grown to a size and scale where they are capable of being national champions.”
Spinning off the firm will mean it’s no longer competing with Asia or other parts of the business for capital, he said. The group will rebalance its debt within the two groups prior to the demerger. That may include redeeming issued debt as well as new issuances, according to the statement.