Chinese poised to pounce on Pru as Tucker rides his luck

Published on Saturday 26 January 2008 15:48

AS MARK Tucker surveyed the snow-covered slopes around the Swiss ski resort of Davos, host of the World Economic Forum, his mind would have turned to the mountains he has to climb to restore Prudential's reputation among investors.

With the shares suffering in the recent stock market sell-off, it was apparent to the board that the company was becoming an attractive target. So it proved.

For the past week, the market has been awash with rumours that Ping An, the second largest insurer in China, was preparing a move on Britain's second biggest insurance company. At least it gave a jolt to Prudential's valuation, but it also put Tucker, the Pru's chief executive, on full alert.

The Chinese company has raised 11bn in the country's biggest share sale to help it finance a foreign acquisition strategy, and it has Prudential firmly in its sights because of its extensive Asian interests. While a full-blown bid appears to be off the agenda, Ping An could take a strategic stake, but it could also be eyeing other insurers – and the British banks.

Asian businesses, some state-controlled, are showing increasing interest in buying up big chunks of western assets, not only because they represent a good buying opportunity at a time of falling valuations, but in order to gain greater exposure to worldwide economies.

Prudential is a big player in a dozen countries including India, Hong Kong, Singapore and South Korea. Aviva, best known for the Norwich Union brand, is also building its interests in the region and also provides a route to the US and the UK. It could also be in the sights of the Asian investors.

Another Chinese firm, Zhongyi Cashmere Company, has been in talks with Kinross-based textiles firm Dawson International, while Indian entrepreneur-led company Tata is likely to buy Jaguar and Land Rover and beer-to-airlines tycoon Vijay Mallya last year bought whisky distiller Whyte & Mackay.

But it is the rise of state-backed foreign enterprises or sovereign wealth funds (SWFs) that is impacting most on debt-laden western economies, ready and able to unleash a wall of cash into every sector where they can buy a share in world trade at a stroke.

The problems for even the biggest of global companies are plain to see. With investors in short supply due to the credit crisis, balance sheets under pressure and stock markets taking a tumble, many western companies have been forced to look east for finance, and to these giant funds in particular.

According to a report from Asia-oriented bank Standard Chartered, these SWFs already hold $2.2 trillion (1.1 trillion) and this could reach $13.4 trillion over the next 10 years.

The biggest – dubbed the Super Seven – have $100bn in assets: the Abu Dhabi Investment Authority, Government of Singapore Investment Corporation (GIC) and others in Kuwait, China and Russia, plus Norway, whose global pension fund holding 80% of the government's oil revenues is the only one in the West.

Another range of government-backed assets, described as the Secret Funds because they are less transparent, include Brunei, China, Kuwait, Oman, Taiwan, Venezuela and the United Arab Emirates.

The process started last November when US investment bank Citigroup raised $7.5bn in new capital from the Abu Dhabi Investment Authority.

A month later, Switzerland's UBS put the begging bowl out to the GIC and a Saudi Arabian investor. Morgan Stanley then raised $5bn from China Investment Corporation, while Singapore's Temasek invested $4.4bn in Merrill Lynch shares.

British firms have also been drawn to SWFs. During its tussle for control of Dutch bank ABN Amro, Barclays turned to China Development Bank and Singapore's Temasek for €3.6bn in return for stakes of 3.1% and 2.1% respectively when it needed the extra finance. Though it was beaten by Royal Bank of Scotland, Barclays did establish new links that may pay longer-term rewards.

But it is also the case that deep-pocketed Asians divide opinion between those who see them as saviours and those for whom they are a threat to national security. Up to now, western companies have been happy to take the money on offer so long as the investors keep their holdings to a relatively minor stake, typically no more than 10%. The SWFs have also tended to be friendly investors, though the Qatari Investment Authority's bid for supermarket chain Sainsbury's showed they also had aggressive potential.

Such moves have fuelled demands by business leaders and politicians to impose legislation that would prevent the SWFs from taking full ownership of key industries and companies, particularly in the US.

Gerard Lyons, group head of global research at Standard Chartered, expects the influence of SWFs to grow within developed countries, but he also warns that there is always a potential backlash in western economies over what they can buy.

"A protectionist backlash against strategic investments is real and threatens global trade," says Lyons. "We are more likely to see western governments seeking to protect national champions and strategic sectors. Already this is happening in the US, with more signs of a hardening of stances across Europe."

Dubai Ports World was forced to abandon its plan to buy P&O's American ports following a national security debate in the US Congress on Arab ownership. The Americans also blocked the Chinese National Offshore Oil Corporation (CNOOC) from buying energy firm Unocal.

Hugh Young, managing director of Aberdeen Asset Management Asia, noted at a briefing in London last week that there were raised eyebrows when the Chinese invested $3bn in the flotation of Blackstone, the US private equity group.

It is not just the Americans that have got into a protectionist frenzy. Concerns have been expressed in the UK over the potential for Russia's Gazprom, the state-owned energy company, acquiring British assets, mainly gas.

As the SWFs and other foreign corporations respond to calls for greater transparency, there could be a cooling of the current tensions that can arise and western economies may need to accept the rise of SWFs as a further sign of a shift in the world economy.

Eventually, the recapitalising of balance sheets by Asian investors may be seen as a key factor in developing better relations and building business opportunities.

In the short term, the suspicions are likely to linger and in an American presidential election year US policymakers are unlikely to be too welcoming. Lyons says: "Perhaps it should not surprise us that the US is not so concerned about Asian central banks financing the US trade deficit as they use their currency reserves to buy US treasuries, but when their SWFs seek a better return by buying equities this causes alarm bells to ring in Washington."