Broker snap: Rating cut for ambitious Pru

3rd Mar 2010 12:08

Prudential this week announced the "truly transformational" acquisition of American insurer AIG's Asian business (AIA) for $35.5bn, but Charles Stanley worries that the price tag "looks to be full".It notes that the UK firm is issuing shares at a discount to embedded value to purchase the business on 1.69x embedded value. "Priced on an earnings multiple of 24.7x pre-synergies, the market will need to be confident that revenue synergies will be substantial," argues analyst Nic Clarke. "And importantly, with a substantial amount to be paid in shares, the degree of dilution will depend on the performance of the Pru's share price."The company has lost a fifth of its value since the deal was confirmed on Monday and many traders think the slump may have made it a target for an opportunistic rival.Charles Stanley is also concerned about a "very long period of uncertainty" given that the rights issue trading does not close until June."Given that we have had a positive stance on the stock it is somewhat frustrating that the robust 2009 results have been overshadowed by the AIA acquisition," says Clarke. "We believe that the strategic rationale for the deal is compelling. However, due to the high degree of uncertainty that will envelop the stock for the next few months until the cost of the deal becomes clearer we downgrade our recommendation from Accumulate to Hold."