Tidjane Thiam looks like escaping the chop at Pru

After the Prudential (PRU) pulled out of its audacious bid for U.S. insurer AIG's Asian business AIA on Wednesday, it looks like Chief Executive Tidjane Thiam will be let off the hook for losing shareholders £450 million in investment banking fees and break clauses (which amount to £150 million).

With large institutional shareholders refused to play ball and said they would vote against the deal to pay $35.5 billion for the AIA assets (a 75% yes shareholder vote was needed), Thiam's team went back to AIG, which is 80% owned by the U.S. Treasury, to ask for a 10-15% reduction in the price. Unfortunately, the AIG board voted down this idea and the Prudential was forced to concede that the deal was no more last week. This was a somewhat surprising result, given the alternative option for AIG is an Asian flotation of AIA with all its uncertainties. However, there were fears that even with a price cut to $30 billion or so, the deal might still have been rejected by shareholders, leaving AIG with red faces all round.

Although the deal to buy AIA's assets looked great on paper in that it would make the Prudential by far the largest insurer the fast growing Asian region with the potential for significant cost cutting through integration synergies, institutions were concerned about the premium that the Pru were paying. The big mistake that Thiam made was to underestimate shareholder resistance and convince key shareholders even before the initial negotiations were finished. The Pru wrongly assumed that with a bit of persuasion after the event, institutions could be brought to the table to stump up the huge capital needed for the rights issue.

So the Pru management has been left with egg on its face and owners of the shares seriously out of pocket. At £450 million, it equates to 18p for every share. Shareholders must be hoping that Thiam drives value in a big way over the next couple of years given his £5 million pay package.

German short selling of bonds ban worries market - send dollar to four year high against euro

The FTSE 100 is currently down 128 points to 5,177 after a fall of 115 points to 10,511 last night on the DOW industrials as traders reacted negatively to the news that German authorities are banning naked shorting of certain financial instruments in the debt market.

The euro fell sharply to hit a four year low against the U.S. dollar of 1.21 versus a 52 week high of 1.51. The rise in the dollar sent commodity stocks sharply lower this morning with BHP down 5% to £18.35 and financials are also under pressure with the likes of Barclays down over 6% to £2.86. BP continued its slide down to hit £5.26, a fall of 1.5%. After announcing its rights issue on Monday to acquire the assets of AIG's Asian unit AIA, Prudential shares are down over 4% this morning to £5.09 as analysts still remain unconvinced about the deal.

The heavy fall in Ithaca Energy (IAE) to £1.53 on no news (down 15p, 9% today) has made it a buying opportunity and this has been added to the portfolio this morning. The volatility is Ithaca is amplified by its dual listing on the Toronto Stock Exchange (TSX) and the London Stock Exchange (LSE) which means that currency and trading in Canada have an impact on the U.K.price. WTI crude oil went below $70 yesterday (the lowest point this year). 

More stock market falls as euro zone worries persist

The FTSE 100 is currently down 50 points to 5,349 and Dow Industrials futures are down 60 points at 10,872 as continuing worries over the health of the euro zone dominate. Investors are concerned that Greece's problems may extend to Spain and Portugal. A national strike in Greece has also not helped sentiment with riots breaking out and flights grounded out of Athens during the afternoon.

The U.S. April ADP employment report also came in slightly light of expectations which has not helped sentiment.

Prudential (PRU) fell 2% to £5.48 as it announced a delay in a rights issue to fund the buy out of  AIG's Asia unit AIA in a $35.5 billion acquisition as the FSA questioned the capital adequacy of the combined company.

Prudential ups stake in GW Pharma

Prudential have increased their stake in GW Pharma (GWP) from around 10% to just over 12% in the last few days which adds reassurance to the buys put in place yesterday. It now looks increasingly likely that the steep drop yesterday was market maker manipulation, triggering stop losses for private investors to fill the large Pru order.  Certainly looking at the pattern of trades there was no evidence of large sells and the price was forced down to 113p at one point yesterday morning. GWP is now trading up 0.5p at 119p to buy.

Portfolio review of the week March 13th 2010

GW Pharma (GWP) - Very quiet week for GW Pharma on very low trading volumes and share price holding at around £1.00. Continuing to hold sizeable position.


Falkland Islands Oil drillers (Desire Petroleum DES, Falkland Oil and Gas FOGL, Borders and Southern BOR) - The prices of the Falkland Oil explorers continued to drop this week on lack of news causing investor apathy, speculators moving their money elsewhere or  shorters in action. The investment thesis for these shares has not changed since the spudding of the first well in February. Actual results from Desire's drilling prospect on the Liz field in the North Falklands basin is keenly awaited. It is expected that Desire's Ocean Guardian Rig should have an indication of oil/gas finds in the next 1-2 weeks. These shares are a binary bet on what happens on Liz. Either Desire will go to less than 50p or we will see a move several pounds higher its that simple. CFD's with guaranteed stops have been placed on BOR and FOGL to limit any downside.


ITV (ITV) - Again little movement in ITV this week, closing at 52p on lack of any news.


Prudential (PRU) - Short term long position taken in PRU earlier in the week which was closed yesterday as the price moved over £5.50. Contrarian Investor UK likes the PRU Asian story but the surge in the markets on both sides of the Atlantic over the last couple of weeks makes me nervous and I have reluctantly decided to take profits given the move from £5.00 to £5.53 in little less than a week, after the falls from over £6 precipitated by the huge rights issue to fund the AIA acquisition (AIG's Asian unit).


Micron Technology (MU) - After a move up from around $8 to over $10 over the last 2 weeks or so on continued positive sentiment on memory chip prices and consumption levels, I have taken profits in half my position at $10.17. Micron closed last night at $9.97 and I continue to hold 1000 shares.

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)

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.

Positive start to March on both sides of the Atlantic

The FTSE 100 is currently up 28 points to 5,838 with DOW Futures up 35 to 10,361. Gains in the FTSE were pruned, after Prudential’s announcement that it was going ahead with the purchase of AIG’s Asian business for £23 billion ($35.5) sent the insurer down 11% to £5.34 (when the shares came back from suspension at 10.30, they were down 14%). The acquisition will be funded by a $20bn rights issue, the largest ever seen in the UK. Prudential will also issue $5bn of senior debt, while AIG will receive $5.5bn in new Prudential shares plus $3bn of convertible shares and $2bn of preferred shares. AIG is 80% owned by the US government, which will mean the US taxpayer owning a stake in the UK’s largest insurer.



The news of a possible €25-30 billion bail-out of Greece by Germany and France was circulating this morning. Greek debt would be purchased in the form of bonds, through their respective state owned banks. But the Greek government will need to commit to at least €4bn worth of cuts in public spending which given union opposition may be difficult to execute.


The British Pound has continued to fall heavily against the U.S dollar and Euro today after a weekend opinion poll put Labour only 2 points behind the Conservatives and there were fears that the Prudential deal with AIG would mean it would need to sell the Pound Sterling to buy U.S. dollars . The pound/dollar hit £1.49, a 2% fall on the day. Currency investors are increasing worried that the increasing likelihood of a “hung” parliament will delay any moves to reduce the size of the U.K. budget deficit.