On Wednesday, Prudential Financial Inc. (PRU) announced the sale of its real estate brokerage and relocation services business, Prudential Real Estate and Relocation Services (PRERS), to Brookfield Asset Management, Inc. The deal, which was closed on the day of announcement, valued at $110 million.
Prudential, the second largest life insurer in U.S., has taken such action as part of its initiative to reshape business by divesting units which lie beyond its core competencies. It is rather focused on expanding in areas in which it has a niche presence.
Prudential has been focusing closely on the growth of three key areas– Asset Management, Annuities and International – and has divested other allied businesses such as Health Care, Property and Casualty (P&C), Retail Brokerage, Investment Banking and Commodities.
Way back in 2003, Prudential sold its Property and Casualty (P&C) unit to The Palisades Group for approximately $260 million, thereby exiting the P&C business. Prudential also sold its stake in Wachovia Securities to Wells Fargo & Co. (WFC), in early 2010, for $4.5 billion in cash. In terms of dollar value, this is the biggest divesture for the company to date.
In October 2011, Prudential announced the sale of its stakes in a Mexican private pension-fund manager to Grupo Financiero Banorte SAB for approximately $200 million. Prior to this, in July 2011, Prudential completed the sale of its global commodities business to Jefferies Group, Inc. for $419.5 million.
Offloading its non-core operations has strengthened Prudential’s balance sheet by returning capital locked in lower-return businesses. The company used funds from these spin-offs and its profitable operations to make strategic acquisitions, in higher-growth areas.
The most significant deal made by the company was the buyout of Star Edison from AIG in February 2011. The transaction augmented Prudential’s already strong foothold in the Japanese market, making it the largest foreign life insurance company in Japan in terms of in-force life insurance. Japan offers attractive business opportunities for the company because of its significant aging population.
We believe Prudential’s successful execution of its business restructuring program, accretion from recent acquisitions, a healthy balance sheet and strong operating trends will help it achieve targeted return on equity (ROE) of 13%–14% by 2013. However, the near-term results will remain volatile due to weak equity and interest rate environment.
We thus maintain our ‘Neutral’ recommendation on the shares of Prudential Financial. The stock also retains a Zacks #3 Rank, which translates into a short-term “Hold” rating.
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