Credit analyst cautious on Prudential due to acquisition burden, risks

By Ronda Fears

Nashville, Feb. 12 - In a tough climate for insurers, Kathy Shanley, senior bond analyst at Gimme Credit, said she would not be chasing Prudential Financial due to its acquisition burdens and risks.

"We believe even strong credits like MetLife face challenges in the current environment," Shanley said in a report Wednesday.

"We view Prudential as a notch weaker than MetLife, and considering the additional burden of the acquisition/joint venture risks it is (or may be) assuming, we would not be an aggressive buyer of this credit."

Fourth quarter results for Prudential (A3/A-) were chock full of special charges and investment writedowns, she noted, underscoring the difficult environment facing the insurance sector.

"As it labors to improve its results, Prudential is working on several strategic deals, including the acquisition of American Skandia and a potential joint venture with Wachovia," Shanley said.

Also, media accounts are suggesting Prudential and Wachovia have resumed their on-again, off-again discussions about a possible joint venture that would merge the brokerage and research functions of the two firms, and a joint announcement could come as early as this week.

On a standalone basis Prudential's business remains unprofitable, the analyst said, with its financial advisory segment posting a $28 million operating loss for fourth quarter. Although the segment loss narrowed from 2001, cost cuts have not been able to completely offset a continued decline in revenues.

"A joint venture would allow for further expense economies and position the firm as an independent provider of investment research," she noted, adding, however, "It will not be easy to structure a win-win transaction."

Reportedly disagreements over who would get to run the show are one reason for the delay in signing a deal, Shanley said.

"Despite the risks, we would view a transaction as a modest positive for Prudential, since we don't believe the firm is effectively positioned to compete against rivals in the brokerage sector on its own," Shanley said.

Meanwhile, Prudential is already moving ahead with the $1.265 billion acquisition of American Skandia, announced just before Christmas. The purchase price includes cash of $1.15 billion plus $115 million in debt.

Prudential plans to fund the transaction out of its insurance operations, selling general account assets and reallocating capital to support the new investment.

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