Wednesday, December 14, 2022
HomeInsuranceM&G: new chief may yield value at lower risk than a break-up

M&G: new chief may yield value at lower risk than a break-up

M&G’s fund managers have supported numerous corporate demergers in the name of unlocking shareholder value. Indeed, the same logic was part of M&G’s separation from Asia-focused insurer and savings group Prudential at the end of 2019.

That move popped the joint valuation for a while. After this, Pru slipped on China worries and M&G moved sideways. Some investors are now mooting a further break-up of the UK savings and investments group.

Schroders mulled a bid for M&G at the beginning of last year. It would have hung on to asset management while disposing of the life and pension businesses. The deal foundered over concerns about a culture clash and slumping investment flows.

Two charts. The first shows M&G net external funds flows (£ billion), 2019 to 2022. Second chart shows that M&G has outperformed against other companies. Share price (rebased) for M&G, FTSE All Share Asset, Schroders and Prudential, Jan to Aug 2022.

These turned positive in the first half of this year for the first time since the demerger. A higher price for the group’s most valuable division should be warranted.

At £5.6bn, M&G’s market value is just a hair below its listing value. A group valuation multiple of 10 times forward earnings is well below 14 times for Schroders. M&G’s lower rating reflects slower growth and its reliance on unfashionable savings and pension products.

 Chart showing UK insurance back book deals, price to enterprise value multiple.  Chart shows Phoenix managed companies, Aviva managed companies and others, 2003 to 2019.

These include a large back book of annuities and with-profit insurance policies, along with the flagship PruFund, which remains open to new business.

The with-profits businesses might be worth 20 per cent of own funds, or £3bn. Other insurance businesses could attract £4.5bn, including net debt, equating to 76 per cent of own funds, think analysts at RBC. Add in £2.4bn for the asset management business on a 14 times multiple and any savings a consolidator might find. That implies 40 per cent upside from a break-up over the current price.

However, a deal would have to be all or nothing. A partial sale of the back book, for example, would scupper a dividend currently yielding over 8 per cent. Meanwhile, M&G is tipped to benefit from Solvency II reforms. Its shares have outperformed peers by nearly 40 per cent this year.

Investors should wait and see whether a new chief executive can squeeze more value from M&G with lower risk than a break-up.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up.

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