Prudential should use its strength to cut rights issue fees
The stock market’s reaction to Prudential’s (LON:PRU) planned record rights issue is ungrateful. After all the mega-refinancings to fill black holes in balance sheets, this is a share issue based on expansion rather than rescue.
The £15bn or so the Prudential wants from shareholders to finance its purchase of AIG’s Asian insurance business is bigger than the rights issues from HSBC, Lloyds or Royal Bank of Scotland. But each of those had nothing to do with growth: the capital merely restored the accounts to where they were before write-offs reduced them.
For Lloyds Banking Group and RBS they were rescue refinancings, just like the then-record £6bn raised by BT seven years ago. Even last year’s £8bn issue by Rio Tinto was to repay debt from past acquisitions, not to finance new investment.
So it is encouraging to see capital markets are open for companies with a positive story to tell, not simply for those trying to undo past damage. But it is discouraging to see that Prudential has not used this strength to reduce the costs of raising its cash.
The terms of the issue will not be know for a couple of months after the announcement of the deal – which is why sellers were able to knock the share price by 20 per cent in little more than 24 hours after it was revealed. But it will almost certainly be at a deep discount even to that deeply depressed price – not only because financial institutions have long gone for that, rather than pricing new equity 20 per cent below market level – but because no risks can be taken with a share price that volatile.
But if it is deeply discounted it should not need underwriting – or the risk of shares being left with underwriters should be so minimal that the fee is negligible too. Yet Pru is estimated to be spending $600m on underwriting fees and another $400m on advisory and legal costs.
A conspiracy theorist would say that the Pru, as the biggest investor in UK equities and thus an underwriter of other companies’ rights issues, has a vested interest in keeping fees high. The insurance giant earned healthy fees for sub-underwriting those mega issues from the banks last year.
But those troubled banks were desperate for capital and cash and in no position to bargain with investment bankers over fees or to shop around for better deals. Pru can negotiate and should. If nothing else, there should be a discount for the scale of its deal: legal work on a $1.5bn issue is the same as for a $15bn issue, for instance.
The Pru’s last rights issue was eight years ago and was received badly by the market because the company had no clear use for the proceeds. The chairman resigned over the mess. That issue was for just £1bn however; the fees alone for this one are $1bn and it would be a shame if an even bigger mess ends up claiming another top scalp.
