What Prudential's 'Shambolic' Rights Issue Shows

"Shambolic": that is the description of the handling of Wednesday morning's rights issue announcement from the Prudential according to one of the company's top ten shareholders that Reuters spoke to.

My own calls to brokers produced comments like "it's an egg on the face moment for the Pru".

Such is the way of these things that the shareholder has not been named – and I am not naming the broker! But the pronouncement is hardly surprising. The market was expecting to hear today how the rights issue would be structured.

The first we knew of problems with the release was when the company cancelled the appearance of enigmatic CEO Tidjane Thiam on Squawkbox Europe just hours before he was scheduled.

Then we learned of other meetings with journalists being shelved. We watched and waited, and finally the news came. The Rights prospectus is being postponed due to unfinished business with the regulators. The Financial Services Authority is apparently still asking questions about the deal and the way it is being financed.

This was always going to be a tough deal to put to bed. Prudential is planning major surgery on its business model – buying the AIA insurance business in Asia for $35.5 billion and funding it in part with a $21 billion rights issue.

Major shareholders have had questions about the price being paid, the size of the deal, and what assets the Pru would have to sell (US and UK operations?) to put cash back into the new business.

Deal Still on Track?

Those doubts have seen CEO Thiam go on a major charm offensive meeting with shareholders in a bid to ease their concerns.

It is perhaps a measure of the market's nervousness about the size of the transaction and the execution risk that the announcement of a delay was greeted with a spike in Prudential's share price. Should shareholders supporting the deal be worried then by the eleventh hour delay?

Aoifinn Devitt at Clontarf Capital is not so sure. "These rights issues can be terribly difficult to put to bed, but it's important that any remaining issues or concerns be resolved before the rights issue is offered to existing shareholders," he said.

Devitt feels this could be a speed hump rather than anything more serious.

Prudential insists that despite the delay, the deal is still on track and the original third quarter timeline is still in place.

But Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, thinks the delay raises the risk that the whole transaction could be knocked off course, and changing market conditions will do the damage.

Debtor Nations
Debtor Nations

"If we continue to see weakness in equity markets the window of opportunity to raise the cash needed could start to close. This will clearly put the rights issue in jeopardy," he said.

Gijsels believes that lower markets are more likely than not from here and a major correction in market levels has already begun. He fears the prospect of a multi-year deflationary recession in the euro zone, and sees the problems with Greek debt as a player in this story.

Ironically, it is these same concerns about the prospects for growth in the developed world that has sent Prudential's CEO shopping in Asia. There is a clear logic in chasing the brighter prospects in the emerging world, rather than trying to scrabble for incremental gains in competitive developed markets.

But, while shareholders may grudgingly acknowledge Tidjane Thiam's pursuit of exciting new opportunities in Asia is the right long term strategy, in the short term they need convincing the big price tag for AIA and the delayed rights issue are the correct way of achieving that.

Given that Thiam has staked his future at the Pru on this deal, if it ultimately fails will he be content running the existing business, and more importantly will shareholders be happy to leave him there?