Financial Times Europe - 09.03.2020

6 ★ FINANCIAL TIMES Monday9 March 2020

O L I V E R R A L P H— LO N D O N

Prudential is this week set to unveil

plans to either float or sell a stake in

Jackson, its US business, as it responds

todemands rom activist investor Danf

Loeb that the 172-year-old insurer

should break itself up, according to peo-

ple with knowledge of the situation.

Third Point, Mr Loeb’s fund, last

month unveiled a 5 per cent stake in the

insurer and said Jackson should be sepa-

rated from Prudential’s fast-growing

Asian business. In response the com-

pany said it would give a strategic

update alongside this week’s full-year

results.

Jackson accounts for almost half of

Prudential’s profit, but it is unpopular

with UK investors who have complained

that it is too complex, and that its for-

tunes are too closely tied to the perform-

ance of the stock market.

Third Point, in a letter to the board,

said the group’s management had

“failed to articulate a clear strategic

path for Jackson” and that it would do

better as astandalone company.

Prudential has owned the business

since it bought it for $610m in 1986. In

2018 alone, it sent £342m of cash back

to the group.

“You can’t argue that it’s not been a

good investment,” said Andrew Baker,

analyst at Citi, who estimates that Jack-

son is now worth about £6.5bn.

Prudential declined to comment on

the potential stake sale or IPO, which

was first reported by The Sunday

Times. Jackson specialises in variable

annuities, which provide retirees with a

combination of some guaranteed

income and exposure to the stock mar-

ket. The combination leaves Jackson

exposed to stock market risk, which is

offset through a complex hedging proc-

ess. That is at the root of its unpopular-

ity with some UK investors.

Analysts said the hedging system is

opaque, and it is difficult to fully under-

stand how stock market movements

will affect the company. Market move-

ments in 2008 caused problems for

many variable annuity companies,

although analysts noted Jackson held up

relatively well.

“You have to give them credit,” added

Mr Baker. “It is a market-leading busi-

ness with a distribution advantage and a

cost advantage [over rivals]. The busi-

ness is running very efficiently, but it is

concentrated in a product that the mar-

ket does not have much of an appetite

for at the moment.”

Prudential’s strategy has been to

diversify. Jackson has been expanding

into fixed index annuities, another type

of retirement product that is growing

more quickly than variable annuities.

“Fixed indexed annuities are a more

simple product, so consumers have

tended to move toward it,” says Andrew

Kligerman, an analyst at Credit Suisse.

Prudential has previously said it could

bring in outside investors as part of an

effort to expand. Bankers said an ideal

scenario could involve an acquisition

co-funded by an outside investor, which

would also take a stake in Jackson. That

would add new revenue streams at the

same time as providing a valuation for

Jackson.

But that sort of plan is unlikely to sat-

isfy Third Point, which is pushing for a

full separation. “With a proper stan-

dalone capital allocation policy, we

believe Jackson could thrive,” it wrote.

One option for a full separation is a

demerger to existing shareholders along

the lines of last year’sseparation of UK

business M&G.

But bankers have warned that such a

split would be hard to deliver. “The

[Prudential] shareholder base is not a

natural holder of Jackson,” said one

banker. “They don’t understand it, and

it’s too opaque,” adding that many

shareholders would look to sell immedi-

ately after a split.

An IPO would also have its chal-

lenges. In 2018 French insurer Axa

floated Axa Equitable, its US life insur-

ance business, as it refocused on prop-

erty and casualty insurance. It got the

IPO away, but the price was below the

bottom end of the indicated range.

Mr Kligerman points out that variable

annuity writers such as Equitable,

Brighthouse and Lincoln all trade at

under five times forecast earnings,

much lower than other types of life

insurance companies.

“These are product areas that see the

lowest valuations in the life and retire-

ment space,” he said.

In the recent equity market sell-off,

Equitable, Brighthouse and Lincoln

have all performed much worse than

the wider S&P 500, falling at more than

twice the rate of the index, according

to data from S&P Global Market Intelli-

gence.

Another option would be an outright

sale. “One solution would be for private

equity to come in and buy the whole

thing, at this point in the cycle that is

probably more likely than a trade

buyer,” said Mr Baker.

Whichever option Prudential

chooses, the process is unlikely to be

quick. “If it was easy to split off the US,

they would have done that instead of

M&G,” said Philip Kett, an analyst at Jef-

feries.

Insurance. trategic updateS

Prudential to reveal plans for US business

Insurer set to announce sale of

stake or Jackson flotation in

response to call for break-up

M E R C E D E S R U E H L— S I N G A P O R E

H E N N Y S E N D E R —N E W D E L H I

Shareholders are lobbying SoftBank to

help bring about an alliance between

ride-hailing groups Grab and Gojek,

south-east Asia’s biggest internet uni-

corns, which are bleeding cash ina bat-

tle for market share, according to peo-

plewithknowledgeofthediscussions.

The talks centre on a tie-up in Indone-

sia. The fourth-most populous country

is the most lucrative market for Jakarta-

based Gojek, whose backers include

Tencent and Google, and Singapore-

based Grab, which counts SoftBank and

Microsoft as investors. Both have inten-

sified efforts to win customers there in

the past 18 months.

“The forces at play here are higher

than simply what Grab or Gojek want,

or indeed don’t want. This is about a

number of long-term influential share-

holders in both companies who want to

either stem the losses or find a way to

exit their investments,” said one Grab

investor.

Talks between the two rivals have

been on and off for at least two years,

but recently there has been a new

urgency, these people added.

It reflects the changed circumstances

of Grab’s big backer, SoftBank, which is

under pressureto prove the high valua-

tions of many of its lossmaking tech

start-ups following the failed public list-

ing of office-sharing group WeWork last

year.

SoftBank founder Masayoshi Son

recently visited Jakarta for exploratory

discussions. What kind of deal SoftBank

may want — if at all — is still unclear, the

people said.

“Today, given the dynamic, both sides

are open,” said one influential Gojek

shareholder. “There is a greater willing-

ness at the highest levels, despite the

delicate issue of control.”

The fact the talks are being taken seri-

ously reflects how the environment has

changed inAsia, where not long ago

entrepreneurs and investors prioritised

growth at the expense of profits.

Any combination could be worth far

more than the combined $23bn valua-

tion the two carry today as they burn

through cash in their race to dominate

across a range of services including ride-

hailing, food delivery and payments in

Singapore, Vietnam and Thailand as

well as in Indonesia.

Additional reporting by Stefania Palma

SoftBank

urged to act

on Grab and

Gojek tie-up

R I C H A R D H E N D E R S O N— N E W YO R K

Tesla is a “better run” company after its
regulatory battles following the recent
addition of independent directors to
oversee Elon Musk, according to the
electric carmaker’s top external share-
holder.
“We thought he was getting things
wrong,” said James Anderson, head of
global equities for Baillie Gifford, speak-
ing about Mr Musk, Tesla’s founder. “I
feel more comfortable now.”
The electric carmaker has overhauled
its board in recent years, stripping Mr
Musk of his chairman role, cutting the
number of board seats and hiring inde-

pendent directors including Larry Elli-
son, the Oracle founder, and James Mur-
doch, the media scion.
The bulk of the changes came aftera
2018 settlement with the US securities
regulator ver Mr Musk’s false claimo
that he had secured funding to take the
firm private. Prior to the lawsuit, Glass
Lewis, the proxy adviser, and CtW
Investment Group, which works with
pensions, had also criticised the com-
pany for stacking the board with direc-
tors with close ties to Mr Musk.
Mr Anderson said the appointment of
Robyn Denholm, one of the company’s
independent board members since
2014, as chairwoman was a decisive
move. She had given the founder “emo-
tional” support and allowed him to
focus on leading the company, he said.

Ms Denholm left a senior role at Tel-

stra, the Australian telecoms company,

last year to focus on Tesla full-time and

is one of a few board members with

automotive experience. Last year, she

led efforts tocut the number of board

seats o seven from 11 after consultingt

with Tesla shareholders. Kathleen Wil-

son-Thompson, a HR executive from

Walgreens Boots Alliance, joined along-

side Mr Ellison as an independent direc-

tor in 2018.

Baillie Gifford first bought shares in

Tesla in 2013 and today owns 7.5 per

cent of the carmaker, a stake worth

$9.7bn. Mr Anderson is co-manager of

the £8.2bn Scottish Mortgage Invest-

ment Trust, the asset manager’s flagship

fund that trades on the FTSE 100, which

alone owns $1bn of the company. The

large holding makes the Scottish fund

house one of the winners from Tesla’s

rally thathas added two-thirds to the

share price since the start of the year.

The Edinburgh-based fund group has

stood by Mr Musk through periods of

tumult that have attracted media atten-

tion. These include smoking marijuana

on an online radio show, describing a UK

volunteer who helped rescue boys

trapped in a Thai cave as a paedophile

and an incessant battle with short sell-

ers betting against Tesla’s stock.

The sparring between Mr Musk and

short sellers, including David Einhorn of

Greenlight Capital, has become one of

the top rivalries in capital markets. The

Tesla founder has marshalledsupport-

ive retail investors o fight back againstt

the carmaker’s critics on social media.

Mr Anderson has long warned that

exchanges with short sellers and other

elements of Mr Musk’s public profile

could distract the founder from the

more mundane tasks of management.

Tesla ‘better

run’ after

shake-up, says

top investor

3 Independent directors check Musk

3 Baillie Gifford ‘more comfortable’

‘We thought [Elon

Musk] was getting

things wrong’

James Anderson of Baillie Gifford

Paul Tudor Jones‘Fixing capitalism is a matter of neither wholesale change nor sticking to the status quo’ yCOMMENT

L E O L E W I S— TO K YO

One measure of the relationship

between Japan’s best-known stock

gauges has hit a 39-year high, reveal-

ing how the effects of a souring

domestic economy and, more

recently, the coronavirus outbreak

arehammeringinvestorsentiment.

The Nikkei/Topix ratio (NTR) s pro-i

duced by dividing the level of the

Nikkei 225 average, a group that

favours Japan’s biggest and most glo-

balised companies,bythat of the

1,669-member Topix index, whose

constituents cover every part of the

domestic economy and include doz-

ens of regional banks.

The ratiohas risen steadily since

the global financial crisis but most

sharply in thepast two years, climb-

ing to its highest level since 1981 last

week. he rise in the NTR indicatesT

investors are betting the Topix could

remain depressed even once the

Nikkei bounces back from some

weakness.

Domestic companies ave sufferedh

from Japan’s ageing demographics,

regional decline, the aftermath of the

2011 quake, successive increases in

consumption tax and the failure to

fully shake deflation. Japan’s three

megabanks have a much larger

weighting inthis index than in the

Nikkei, which suggests theirdiscom-

fort rom the Bank of Japan’s negativef

interest rate policy — which squeezes

their margins —is visible in the NTR.

Nikkei stocks, meanwhile, are more

leveraged to a strong global economy

and weaker yen. The price-weighted

group is dominated by companies

that, by Japanese standards, are run in

a shareholder-friendly way, such as

Fast Retailing, SoftBank Group and

Tokyo Electron. In addition, notes

Mizuho strategist Masatoshi Kikuchi,

the Nikkei 225 regularly reshuffles its

components to “bring in good-quality

names, while the [Topix]’s relaxed

standards... have left it with numer-

ous listings that serve no obvious pur-

pose”.

The NTR’s new high comes despite

the BoJ’s ¥6tn-a-year exchange

traded fund buying programme,

which istilted owards Topix-trackingt

ETFs. The programme may, perhaps,

be offering some psychological sup-

port to the whole market but, for all

its heft, is not impeding the rise of the

NTR.

Depressed outlook leak signal for JapanB

as Nikkei stretches away from the Topix

Ratio between the Nikkei  and Topix close to a -year high

Source: Refinitiv







    

Bank of Japan

declares quantitative

easing programme

BoJ announces

negative rates policy

Prudential has owned its US business Jackson since 1986 —Luke MacGregor/Bloomberg

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MARCH 9 2020 Section:Companies Time: 8/3/2020- 17:58 User:julian.summers Page Name:CONEWS1, Part,Page,Edition:USA, 6, 1