REUTERS - PRU INVESTORS WARM TO AIA DEAL

Raji Menon, 13:57, Thursday 11 March 2010

LONDON (Reuters) - Major shareholders in Prudential are warming to the insurer's $35.5 billion (23.6 billion pound) bid for AIG's Asian business following meetings with chief executive Tidjane Thiam, investor sources said. Thiam, who has been meeting UK investors this week to explain the merits of the blockbuster deal, appears to be winning over sceptics, they said. "We asked him to justify the deal to us and he made a pretty good fist of it," said one head of equities who met with Thiam. "Coming out of it, we were a little more positive than we thought we would be. It is a bit of an opportunity for Pru; a real catch and it will make them very strong indeed. All in all, there is an argument for (the deal)."

Another large investor who also met Thiam added: "The key message was that AIA will make a lot more money under Prudential's ownership. "The AIA business has much poorer margins than the existing Pru business so there is some credibility in that argument. Overall, we felt what they are doing does have some merit."

AIG shares were up nearly five percent in pre-market trade shortly after Reuters reported growing backing for the deal. Investors said Thiam told them that removing inefficiencies in AIA's operations would result in strong revenue synergies and said he reassured them on the price tag, which some have said was too high. "Pru's Asian operations are very efficient and as a result their margins are very high...AIA is not as productive. Get the two together and you can make a case for increasing that productivity and justifying what ostensibly looks like a pretty high valuation," said the head of equities.
"Pru sees some $770 million of revenue synergies coming through this increased agency productivity. This isn't a company that is going to make $500 million of new business, it can in time make $2 billion on new business and so you can justify the price."

Thiam also told investors AIA has been on his radar since September 2008, when he was Prudential's chief financial officer. "We thought this is quite important because they do know the operations better than we may have thought," added the head of equities.

However, some investors are yet to be convinced. "Tidjane is relatively unknown -- he's only been there for nine months and therefore for an unknown to be asking for this kind of money, people are reasonably sceptical," one said. "There is also a bit of worry that they may redomicile -- we may end up buying all the stock and they may take off to Hong Kong," he added.

(Editing by David Cowell)

China - is this a bubble soon to burst?

Today it was announced that Chinese inflation hit a 16 month high, meaning potentially higher interest rates. The annual rate of consumer price inflation rose to 2.7% in February, up from 1.5% in January, and ahead of analysts' expectations of 2.3%. In addition, new loans exceeded forecasts, adding to the case for the government to cut stimulus measures. The People’s Bank of China hasn’t raised benchmark interest rates since December 2007, but the central bank has ordered commercial lenders to increase their capital reserves three times since last December. However it has been pointed out that the figures should not set alarm bells ringing, as the New Year in 2009 fell in January not February, economists say the rate of increase in consumer prices in February 2010 was boosted as it is being compared with weaker spending last year.

China's exports in February were up 46% from a year ago, which was more than analysts' forecasts and the economy grew by 8.7% last year, exceeding government expectations driven partly by the Rmb4,000bn ($585bn) stimulus programme. The Shanghai Composite (SSE) is down 7% year to date to 3,052.

In addition to inflation concerns, some commentators worry about the Chinese property market increasingly looks to be entering a bubble phase. But an interesting perspective was offered by the FT.com today, "Unlike the dramatic increase in household leverage that precipitated the US subprime crisis, Chinese household debt amounts to approximately 17 per cent of gross domestic product, compared with roughly 96 per cent in the US and 62 per cent in the eurozone. Home buyers in China are required to make minimum downpayments of 30 per cent before receiving a mortgage, and at least 40 per cent for a second home.

Although price increases in the Chinese residential market appear rapid (more than 20 per cent in 2009), such headline figures cannot be viewed in isolation. Over the past five years, urban household incomes grew at a 13.2 per cent compound annual growth rate, compared with an 11.9 per cent CAGR in home prices. Pockets of overheating can be found in some regional markets. In Beijing, Shanghai, Shenzhen and Hangzhou, for instance, prices outpaced income growth by more than 5 percentage points over the same period. But, this can be seen as a symptom of new urban wealth being put to speculative use, rather than the profligate use of leverage.

The combination of excessive leverage and mortgage securitisation were at the epicentre of the US subprime crisis. Both these factors are absent in the Chinese context. The commercial property sector has inspired just as much concern, with prices rising 16 per cent in 2009, in spite of low rental yields and prime office vacancy rates as high as 21 per cent and 14 per cent in Beijing and Shanghai, respectively. Yet occupancy and rental rates have started to pick up for prime properties.

The crux of the problem with the Chinese real estate sector is that property is seen by the country's investing class as a store of value, within an economy that offers its citizens limited investment options. I share many of the concerns about flawed incentives and overheating in the property market - but even if prices were to correct, this would not trigger the type of devastation that might arise in an over-leveraged economy."

Prudential added to portfolio following announcement of Asian deal

On March 1st, U.K. listed life insurer Prudential (PRU) announced an ambitious plan to acquire AIA, the Asian assets of troubled U.S. life insurer AIG for £23.5 billion ($35.5 billion). The deal dwarfs the company's market capitalisation of £13.6 billion ($20.4 billion). AIA is a significant player in the fast growing Asian insurance market, having a 19% share in China. The acquisition will make the combined company the no.1 player in China, Vietnam, Hong Kong, Singapore, Indonesia, South Korea, The Philipines and Thailand and over 85% of profits will come from the region (46% currently). To fund the acquisition, a £13.4 billion ($20 billion) rights issue was announced, the largest ever in the U.K.. Prudential will also issue $5bn of senior debt, while AIG will receive $5.5bn in new Pru shares plus $3bn of convertible shares and $2bn of preferred shares. The rights issue is fully underwritten and a number of Asian sovereign wealth funds are lined up to share a share. PRU's share's fell 20% on the day of the announcement and now trade at £5.38. Tidjane Thiam, the Pru's chief executive also said the deal will generate $340m in savings once the offices have been rationalised The company has also accelerated plans for a dual listing of the shares in Hong Kong in April.

In effect a reverse takeover of AIA, the deal is a high risk strategy for Prudential but given the maturity of the U.K. life insurance business, an acceleration of the company's presence in the fast growing Asian region seems strategically sound. The added bonus of cost cutting potential is also supportive. Though the deal is not cheap at 1.6 times embedded value (UK insurers trade at one times embedded value), the future growth potential of the Asian region is significant and way ahead of Europe. Though UK brokers were largely unimpressed and hedge funds were said to be shorting heavily on the announcement, Asian buyers drove Pru back from its lows last week. Existing institutional investors have been making negative noises about the priority that Thiam is placing on new Sovereign wealth investors and lack of information before the rights issue prospectus, but given the importance of the new Asian Investors this seems sensible. I have opened a position today at £5.36 given the potential of the Hong Kong listing and over negative reaction to the acquisition. It is frustrating to have missed the £5.00 low, but a move over £5.50 seems likely as the investor road show continues.