Spinoff of its UK Business 10 Days Before the Scheduled Brexit Date
After a year and a half to structure the separation, British multinational financial services player Prudential Plc (PRU LN) has timed the demerger of its declining UK & Europe asset management, M&G Plc (MNG LN), ahead of the scheduled Brexit date on Oct 31. While there won’t be any index play due to MNG’s size, short-term negatives give pause for a pre-Spin entry but will monitor the Parent post-Spin due to its high-growth US, Asia and Africa businesses.What's Happening?
Chasing the growing markets in Asia and Africa, Prudential Plc (PRU LN) is separating its declining UK & Europe asset management business called M&G Plc (MNG LN, Spinoff) on October 21, 2019. There are several key challenges MNG will have to tackle post-Spin, while PRU will continue to grow its accounts in Asia (+10% in 1HFY19) and its emerging Africa business, as well as improving its stable US operations.
Additionally, PRU (ex-Spin) is expected to have a dividend yield of 3.1% compared to its peers (PRU US: 4.6%, MET: 3.9% & AIA: 1.8%), while MNG’s dividend yield is expected to be around 4.1% at our current technical split prices. Furthermore, in the longer-term, we believe there is a potential separation of PRU’s high-growth Asia segment, which currently trades at a significant 107% premium to its US operations on an average P/E multiple (13.1x compared to 6.4x in the US). The separation of the Asia business will likely eliminate the current 20% discount from PRU (Combined), creating further value for shareholders in the long-term.
The Edge View (PRU LN, Parent Ex-Spin)...
Following the Spinoff, PRU LN (ex-Spin) will focus on its high-growth US, Asia and Africa businesses, like the Jackson National Life Insurance arm in the US (AUM of £145bn ($180bn)), EastSpring in Asia (AUM of £169bn ($210bn)) and the emerging Africa business (initially entered Ghana in 2014, now present in five African countries). In 1HFY19, PRU’s (ex-Spin) business registered a growth of +5% compared to MNG’s (Spinoff) business of -7% in the same period. Furthermore, we believe the Spinoff will not only remove the Brexit uncertainty over PRU (ex-Spin) but also paves the way for the separation of the Asia business in the longer-term.
The Edge View (MNG LN, Spinoff)...
Post-Spin, there will be some negatives hovering around MNG (Spinoff) such as a no-deal Brexit (the UK looking to leave the European Union on October 31, 2019) and the blocked Rothesay deal (highlighted on August 16, 2019). However, from an index-play dynamic, we expect MNG to list around a market cap of £7bn and remain in the FTSE 100 Index, which consists of the top 100 companies by market cap in the UK (like Meggitt Plc (MGGT LN), Polymetal (POLY LN) and Rightmove Plc (RMV LN), which have market caps below £4bn and are also constituents of the FTSE 100 Index).
The management stated that the hearing to appeal the rejected Rothesay deal will take place after Spring 2020 (at least 6 months from the Spin date). Therefore, in our Base case scenario, we assume that the Rothesay deal does not go through while for our Bull case, we assume the court provides a green light to the deal.
Prudential is a parent holding company. Co., together with its subsidiaries, is an international financial services group with its principal operations in Asia, the U.S. and the U.K. In Asia, Co. has operations in Hong Kong, Indonesia, Malaysia, Singapore and other markets. In the U.S., Co.'s principal subsidiary is Jackson National Life Insurance Company. In the U.K., Co. operates through its subsidiaries, primarily The Prudential Assurance Company Limited and M&G Investment Management Limited. Co. provides a range of retail financial products and services and asset management services throughout these territories.
The Edge Group - Global Fundamental Catalyst Investing. The Edge provides investors with access to hidden corporate value from Global Special Situations using a pioneering approach to investments. Founded in 2005 by fund management and investment banking professionals to provide high quality, private equity-level research on Global Corporate Divestitures for the benefit of fundamental event-driven, growth and value-oriented investors in this difficult to track, but proven investment space.
The Edge will look to screen and analyze include Spinoffs; Reverse Morris Trusts; Squeeze Outs; Privatizations; Demutualization; Deep Discounted; Rights Issues; Rights Offering; Restructuring; Insider Purchases / Buying Change of Management / CEO Change; Deteriorating fundamentals; Post-Bankruptcy; Reorganization; Tender Offer; M&A Deals; Secondary Offering; Share Swap; Thrift Conversions; Share Buybacks; Activist; Mergers. All analyzed from a fundamental point of view.
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