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Goldman Sachs says Prudential’s Asian plan is right

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Prudential should sell its American business before hiving off its Asian assets, a confidential strategic review designed to appease investor concern about its inherent value has found.

The review, undertaken by bankers at Goldman Sachs at the behest of the company’s besieged management, found that if the British insurer needed to dispose of an asset, it should be its US operations ahead of its much-vaunted Asian business.

Although the work found that it would make sense to hive off the high-growth Asian business at some stage in the future – perhaps through an initial public offering – doing so in the current environment would not create any extra value for shareholders.

The strategy document, details of which can be revealed by The Sunday Telegraph for the first time, essentially backs the aims of Tidjane Thiam, chief executive.

Mr Thiam was responsible for the company’s $35.5bn (£22.5bn) deal to buy AIA, the Asian business of American International Group, a deal which collapsed after he lowered Prudential’s offer after shareholder concern at the initial price. The cessation of the deal, however, sparked anger about the group’s strategic direction.

Since then, however, Mr Thiam has made it clear he is keen to continue to use Prudential’s low-growth UK arm to fund continued expansion in Asia, which the company pinpointed in its interim results in August as “the region with the best potential for high and profitable growth”.

The US life insurance and annuities business, Jackson National Life, accounted for £667m of Prudential’s £1.75bn embedded value in the first six months of 2010, against £636m from Asia and £449m from UK operations. Embedded value is a key indicator that measures the future profitability of existing business.

Details of the review are expected to be discussed at the company’s investor meeting at the end of November, as the company attempts to placate shareholders after the rebellion that followed the AIA withdrawal.

At the time, investors including Schroders and Jupiter Asset Management expressed significant concern about the board’s decision making, with anger turned first at Mr Thiam, and then, and more concertedly, at Harvey McGrath, Prudential’s chairman.

Goldman, Prudential’s broker, undertook the work at the behest of Mr Thiam following feedback from investors in a series of meetings with himself, Mr McGrath and James Ross, the company’s senior independent director.

It is understood the conclusion was that based on current market dynamics – not least the state of the global economy and the number of insurance assets currently up for sale –
it would not be sensible for Prudential to begin a sales process.

The review also looked at the potential value of fund manager M&G, which acts as Prudential’s own asset manager in Europe as well as having a retail fund business.

It is believed that were M&G to be hived off in the future, the Prudential assets would be retained within the group, leaving a much leaner M&G to be divested.

News of the strategic review comes as Prudential is known to have lodged the names of two potential non-executive directors with the Financial Services Authority for regulatory approval.

The two – previously reported to have been Paul Manduca and Sir Howard Davies, ex-head of the FSA – should be cleared by the regulator by mid-October.

Company insiders believe that Sir Howard may be in the running to replace Mr McGrath as chairman when the time comes for him to depart.

A number of investors further down Prudentials’ shareholder list, including Fidelity, which owns a 1.17pc stake, are known to remain angered by his continued tenure and still blame him for the AIA bid process, which cost the company some $450m.

However, attempts to gain support from major shareholders have floundered, not least because of the insurer’s 13pc share price rise since its AIA aspirations came crashing to a halt at the start of June. A Prudential spokesman declined to comment.

Source : Telegraph