Brexit and a lack of firepower could hinder a potential Lloyds takeover of M&G Investments as speculation surfaces that the asset management business would aid the high street bank’s strategic push into wealth management.
This week, The Times speculated that Lloyds could use its excess capital to buy Prudential UK, which is due to demerge from the international business by 2020, for a price tag of £10bn to £12bn. Prudential announced it was merging its M&G and UK savings businesses in August 2017, creating a business with £332bn in assets under management.
Portfolio Adviser has contacted both Lloyds Banking Group and Prudential for comment.
M&G attractive alternative to traditional lending
M&G would be particularly attractive to the retail bank, the newspaper reported.
It said: “The whole of the Pru UK may not be quite the right fit for Lloyds as it would come with a capital-intensive with-profits business and a large chunk of annuities sitting on its balance sheet. More enticing might be if Lloyds could find others, such as Phoenix, the specialist insurer, to take on some of those divisions, leaving it to snap up M&G.”
The Times argued the deal would make sense for Lloyds because shares are sluggish, despite large profits and a return to dividends, because it cannot wring anymore growth out of traditional lending.
Brexit hinders Lloyds’ firepower
But JP Morgan said Lloyds does not have the firepower for the deal forecasting that it would have excess capital of around £2bn above required capital ratios at year end 2018, significantly below the price tag touted by The Times. Lloyds would have to raise capital through share issuance at a level that would significantly undervalue the group, according to an analyst note published on Wednesday.
JPM stated: “Wealth and retirement solutions are a strategic focus area for Lloyds management, so the group is likely to be open minded about opportunities for growth. However, a large target such as parts of Pru UK/M&G would ultimately require a deal funded via share issuance, which we believe would rule it out from a financial accretion point of view.”
Brexit had hit Lloyds price to earnings hindering its appetite to issue further shares, JPM noted.
However, for Prudential the deal would remove the hassle of demerging and creating a separate listing for the UK business, JPM said. It would also mean cash on the table for shareholders.
Last year, Mario Mazzocchi, a pensions and investment director at Lloyds’ Scottish Widows business, revealed the bank was looking to capitalise on its position as Britain’s only integrated high street bancassurer to provide wealth and retirement services to its retail customer base.
Scottish Widows sold its asset management arm, Scottish Widows Investment Partnership, in 2014 to what was then Aberdeen Asset Management. The insurer is currently looking to pull investment business totaling £109bn from Aberdeen Asset Management following its merger with rival Standard Life.
