US asset manager Third Point has written to members of Prudential’s board to recommend splitting up its businesses in Asia and the US.
“While we applaud Prudential for taking the initial step of separating its European operations into M&G, we believe that a more significant opportunity exists,” wrote Third Point chief executive Daniel Loeb on 24 February.
“Separate the company’s Asian and United States operations to increase investment in both businesses, optimise growth and drive higher valuation.”
He argued that PruAsia and Jackson “share no discernible benefit from being operated under the same corporate umbrella”.
“The plan shares similar reasoning to the company’s stated rationale for separating M&G,” Loeb added.
“The very persuasive logic behind [the move] makes us wonder what drove the board’s decision to keep Jackson and PruAsia together.”
Prudential confirmed receipt of the letter via a statement on its website.
The UK firm said it “proactively engages with shareholders with regards to group strategy and structure, and looks forward to commencing a dialogue with Third Point with regard to the views outlined in the letter”.
An update of Prudential’s group performance and strategy will be provided in its full-year results on 11 March.
Three key drivers
The four-page letter from Third Point goes into details about the benefits it believes Prudential could achieve by following its recommendations.
“Despite the strengths of these unique businesses in Asia and the US, Prudential trades for less than 10x consensus 2020 earnings, and has returned <0% on a cumulative basis over the past five years,” Third Point wrote.
The firm outlined three primary reasons for its disappointing performance:
- The current portfolio deters natural holders from owning PruAsia – it is “materially undervalued by investors simply because it is coupled with Jackson”;
- Management has prioritised dividend growth over reinvestments – which Third Point described as a “short-sighted” policy that has “stunted growth and led it to forego new business investment, especially in Asia”; and,
- The corporate structure is inconsistent with an ‘Asia-led strategy’ – as the current executive management team has “limited experience” in the region.
Sleepy, Eurocentric focus
Loeb described PruAsia as “a unique asset”, which “deserves a singular focus on Asia, managed from headquarters in Asia”.
Mark Taylor was the founding chief executive of PruAsia from 1994 until 2003, and later become chief executive of Prudential between 2005 and 2009.
Loeb credited Tucker with the “expansive growth” of the Asia operation.
But a “commitment to heavy reinvestment waned under Tucker’s successors, Tidjane Thiam and current CEO Mike Wells, both of whom have favoured a sleepy, Euro-centric focus on ‘progressive dividends’”.
He described that as “an ill-conceived strategy, given the discounted valuation of Prudential plc and plentiful opportunities for reinvesting capital at high-IRRs in Asia”.
Born in the USA
Meanwhile; the letter said that “management has also failed to articulate a clear strategic path” for Jackson.
“With a proper standalone capital allocation policy, we believe Jackson could thrive, driven by its solid distribution franchise, a younger than average variable annuity book, strong cash flow potential and the ability to pivot across products.”
In order to address the points raised by Loeb and his team, and “close the yawning gap between the current share price and intrinsic value”; Third Point has called on Prudential to consider the following:
- Separate Jackson from PruAsia and create two publicly-listed companies – Loeb said he believes it “can be done efficiently without material tax or other costs”.
- Once the companies have been separated, “pivot from dividend growth to long-term value creation as the central priority”.
- Eliminate duplicative group head office costs, which Third Point believes could save nearly £200m ($258.5m, €238.6m) per annum. Also, move the primary headquarters for PruAsia to Hong Kong and for Jackson to Michigan.
- Equip PruAsia with local leadership at management and board levels. Ensure each board has intellectual diversity, local market knowledge and relevant industry expertise.
“If PruAsia and Jackson were separated, resulting in a greater focus on reinvesting capital in each unit and streamlining central costs at the group level, our analysis indicates that the interests represented by Prudential plc shares can double within three years,” Loeb added.