Prudential, the UK insurer, did another strategic U-turn yesterday when it sold Egg, the loss-making internet bank, to Citigroup for 40 per cent less than it had valued the business just a year ago.
Citigroup bought Egg for £575m ($1.1bn) after Prudential decided that the banking subsidiary’s mounting losses were too great to continue with. Prudential reported on Monday that Egg had suffered a loss of £145m last year, much higher than previously indicated.
Defending the decision to sell at such a reduced price, Mark Tucker, Prudential chief executive, said it was the right thing to do given Egg’s rising losses, which have been triggered by mounting bad debts on personal loans. He added that Prudential would have been forced to put more capital into Egg if losses persisted.
The sale price is £375m less than the £950m valuation Prudential put on Egg when it bought out minority shareholders in the business in January last year. It is also significantly lower than the price other banks, including Royal Bank of Scotland, were willing to pay for Egg when it was put up for sale in 2004.
“They have clearly been dumbfounded and astonished by the amount of money they lost last year. But they have been dumbfounded and astonished several times by Egg,” said Bruno Paulson, an analyst at Sanford Bernstein. The decision to sell Egg comes as Mr Tucker is conducting a far-reaching strategic review of Prudential, which has been touted by some investors and analysts as a candidate for a potential break-up.
Analysts and some investors yesterday broadly welcomed the decision to sell, even at the reduced price. David Nisbet, an analyst at Merrill Lynch, said: “I don’t think Prudential would have got a better price selling Egg now. There is an argument that you could have waited two years and got a better price – but that would have required more capital and I’m not sure shareholders would have supported that.”
Citigroup said it expected to return Egg to profitability quickly by merging information technology systems and using its expertise in lending to consumers with patchy credit histories to stem losses.
It also plans to retain the Egg name and offer a broader range of products to UK customers. “We believe the Egg brand has been able to get the trust of people,” said George Awad, chief executive of Citigroup’s consumer business in Europe, the Middle East and Africa. “A lot of money has been spent on it.”
As part of the deal, Prudential signed a five-year deal to provide life assurance and pensions products to Egg’s base of more than 3m customers. Citigroup also agreed to distribute Prudential life assurance products in Thailand, Indonesia and the Philippines.
Prudential yesterday also brought forward its new business figures, which it had been due to release on Tuesday.
These showed total group insurance growing 16 per cent year on year to £2.47bn, driven by Asia, up 30 per cent to £956m, and the US, where the Jackson Life business rose 21 per cent to £613m. However, UK retail business grew just 1 per cent to £900m, less than some of Prudential’s main rivals.