Prudential Financial Inc. (PRU) has entered into an arrangement with Jefferies Group Inc. (JEF) to divest its global commodities business for approximately $430 million. The sale value approximately equals book value as of December 31, 2010. The deal is expected to close in June 2011, subject to regulatory approval.
The divesture includes the U.S. based Futures Commission Merchant, Prudential Bache Commodities, LLC; the broker dealer, Prudential Bache Securities, LLC; U.K. based Bache Commodities Limited; and Hong Kong-based Bache Commodities (Hong Kong) Ltd.
Following the closure of the deal, the acquired businesses will operate globally as Jefferies Bache.
Prudential Bache offers brokerage and clearing services in listed derivatives on all major futures and options exchanges around the world. Also, it offers over-the-counter trading in foreign exchange, base and precious metals, and energy and agricultural swap transactions. Through acquiring the global commodities business of Prudential, Jefferies will have wider exposure in the commodities market as well as enhance growth in the futures market.
Prudential reported fourth quarter core operating income of $1.78 per share, significantly ahead of the Zacks Consensus Estimate of $1.47. Earnings also compared favorably with $1.20 in the year-ago quarter. Results for the quarter benefited from a greater reduction in policy acquisition costs and a higher reduction in minimum guaranteed benefit reserves, coupled with a strong performance in U.S. retirement and international insurance operations.
With its diverse business mix, resilient earnings and a strong management team, the company is well positioned to enhance shareholder value. Prudential’s solid balance sheet, global reach, superior franchise and expanding distribution with the addition of AIG Star/Edison augur well. However, we are concerned about its potential investment losses, exposure to foreign exchange movement and business link with the volatile equity and credit markets.
The Zacks Consensus Estimate for first-quarter 2011 is $1.50 per share. For fiscal years 2011 and 2012, the Zacks Consensus Estimates are a respective $6.47 per share and $7.64 per share.
We maintain a Neutral recommendation on Prudential over the long term. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
Headquartered in Newark, New Jersey, Prudential Financial Inc., through its subsidiaries and affiliates, offers a wide array of financial products and services including life insurance, annuities, retirement-related services, mutual funds, investment management and real estate services.
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