For activist investors, the quick route to big profits is often plotted through demands to break up a company. The idea is simple: The parts would be worth more alone than together.
But another recent UK-Asia breakup story shows it’s not so easy. In 2019, Prudential Plc was a London-based global life insurance group with a high-growth, supposedly underappreciated Hong Kong-based Asia business, a US variable annuity arm and a 171-year-old British base.
Prudential – no relation to Prudential Financial Inc. of the US – first spun off the UK arm in October 2019, which was renamed for its asset-management brand, M&G Plc. Two years later, after pressure from Dan Loeb’s Third Point LLC, it listed the US business, Jackson Financial Inc.
The combined stock market value of the two London-listed and one US-listed businesses today is almost 11% less than Prudential was the day before the M&G split, in dollar terms – and that includes $3 billion of equity Prudential raised late last year. Plus, Prudential was already down heavily since early 2018 when the first split took place in 2019.
But what’s probably worse for investors is that shares of today’s Prudential – which is focused on Asian and African markets where life insurance is a growth industry – are valued in line with the shares of the mature, slower growth M&G. Both stocks trade at less than 11 times forecast earnings per share for the 12 months ahead, according to Bloomberg data. Prudential was meant to rapidly climb toward the valuation of its close Asian rival AIA Group, but the Hong Kong-listed company remains a long way ahead, at more than 15 times forecast earnings.
Jackson, meanwhile, is now a relatively small company highly concentrated in a complex annuity product that investors see as risky and whose fortunes are tightly linked to equity markets. It trades at less than two times forecast earnings.
Prudential’s split might still add value in the longer term: Analysts at Citigroup Inc. and Bank of America Corp., among others, still expect the insurer’s valuation to approach AIA’s eventually. Several things have gone wrong and there are lessons here for activists in general and Ping An’s drive to break up HSBC in particular.
One big spanner in the works has been Covid and the closing of the Hong Kong-China border. That slowed the search for a new chief executive: Prudential finally appointed Anil Wadhwani from Manulife Financial Corp.’s Asian armlast week, but he won’t start until February 2023.
More importantly, the border closure hit sales hard. Pre-pandemic, almost one-third of Prudential’s new business came from policies sold to mainland Chinese in Hong Kong. They have to visit the territory and have a local bank account to buy these policies, so those sales have vanished.
This offshore business exists because Hong Kong health insurance gives wider coverage and access to better hospitals than mainland Chinese policies. Also, offshore savings products offer exposure to a wider array of foreign currencies and financial assets. AIA does this business too, but it sells more onshore China policies and has bigger businesses elsewhere in Asia. The business might return, but it relies on China’s approach to Covid easing.
Another big issue is more relevant to HSBC – or any international breakup proposal. To get the best value for separate parts of a company the investors who are likely to pay more for the shares need to be able to buy them easily.
Breakups within a single market, especially in the US, can perform better more quickly because the new shares sit in the same market as the old ones. There are no guarantees, though. A study of several demergers by UBS Group AG analysts last September found the best valuation improvements over the first year were in deals such as News Corp.’s split from Fox Corp. in the US in 2013 and Siemens AG’s split from Osram Licht AG in Germany the same year. However, Siemens’s demerger of Healthineers in 2018, also within Germany, didn’t initially add any value.
London-listed Prudential has lots of international investors. Many might prefer focused companies with a clear story rather than broad conglomerates that blur returns from different businesses.
However, in the west, many investors will see Prudential now as a bet on emerging markets, which they’ll only make when confidence is high and the dollar not too strong. Investors in Asia, where Prudential has a Hong Kong dual listing, are more likely to see it as a local blue chip, like AIA.
But one set of investors can’t quickly replace another group in a different country. Even if Asian, or just Asia-focused, investors might value Prudential, or HSBC’s Hong Kong bank, more highly in principle, getting them to suddenly buy it and bid up the value isn’t going to happen quickly, or maybe ever, in practice.
Breaking up really can be hard to do.
More From This Writer and Others at Bloomberg Opinion:
• The Conglomerate Survives Even After GE Split: Brooke Sutherland
• The Hong Kong Dollar’s Peg Has Become Untenable: Richard Cookson
• HSBC Split Is a Surefire Way to Destroy Value: Paul J. Davies
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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