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Prudential IPO in 3Q
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November 8, 2000: 2:11 p.m. ET
Insurer demutualization slated for 3Q, could produce top 5 U.S. issue
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NEW YORK (CNNfn) - Prudential Insurance Co. of America plans to launch an initial public offering in third quarter next year, which could result in one of the largest U.S. IPOs ever, analysts said Wednesday.
Prudential's board will vote on plans for the Newark, N.J.-based insurer to demutualize before the end of the year, a company spokesman said. Then, the insurer will have to work out regulatory requirements, such as securing policyholder approval and endorsement from the New Jersey insurance commissioner. Prudential expects to launch its public offering sometime in third quarter.
"The IPO has to come at the end of a complex regulatory process," a Prudential spokesman said.
 Prudential has been working with Goldman Sachs regarding the IPO but has yet to select a lead underwriter. Prudential originally announced in early 1998 that it would be seeking to convert to a stock-owned company.
The Prudential IPO will be the first of a wave of insurance IPOs expected in 2001. New issues are also anticipated from Prudential, Principal Financial Group and Phoenix Home, which could add more than $25 billion of market value to the insurance sector, said analyst Caitlin Long, of Credit Suisse First Boston.
The insurance sector produced some of the largest IPOs this year. MetLife Inc. floated a $2.8 billion issue in April and John Hancock Financial Services Inc. produced a $1.7 billion deal in January. The large deals typically produce little pop in their first day but then surge. MetLife (MET: Research, Estimates) gained 3.5 percent in its first day but has since nearly doubled, while John Hancock (JHF: Research, Estimates) rose 4.4 percent in its debut but has since risen 75 percent.
A top five U.S. IPO
The float of Prudential Insurance Co. of America promises to produce one of the largest U.S. IPOs ever, analysts said. Prudential had $20.1 billion in equity during first quarter 2000 and $366.6 billion in assets under management at the end of 1999.
Prudential will probably float about $4 billion in stock in its IPO and distribute the other $16 billion to shareholders in cash or some other consideration, said analyst Colin Devine of Salomon Smith Barney.
Analyst CSFB's Long said it is still too early to predict the deal's valuation. MetLife had a return on equity of 10 percent, which is a key driver of IPO valuation, but Prudential's ROE is as yet unknown.
"Therefore, any estimates of a valuation would be purely a guess," she said.
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This is just like Ed McMahon showing up at your driveway during Christmas. This will be a windfall for policyholders.
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Analyst Colin Devine of Salomon Smith Barney |
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At $4 billion, the Prudential transaction would vault the company into fourth place among top 10 U.S. IPOs, behind AT&T Wireless (AWE: Research, Estimates), which remains the top U.S. new issue at $10.6 billion. Other IPOs still ahead of Prudential include United Parcel Services Inc.'s (UPS: Research, Estimates) $5.4 billion issue and Conoco Inc.'s $4.4 billion deal.
"The Prudential IPO would be well received," Devine said.
Other IPOs in the insurance sector have produced small first day gains but proved to be solid long-term investments. Analysts expect Prudential to follow suite.
"Investor demand will be very high in light of the stellar aftermarket performance of every demutualization," said CSFB's Long.
From member to stock ownership
Companies that demutualize convert from member to stock ownership and can choose a variety of options to achieve this end result. The most popular, a full demutualization, happens when the company unbundles policyholder's equity and ownership with policyholders receive either cash, stock or policy credits. Both Metlife and John Hancock chose to fully demutualize.
The second option for insurers includes forming a mutual holding company, while the last option calls for the insurer to take a unit public or merging a subsidiary into an existing public company.
 Prudential will be voting on a full demutualization and anticipates that between 11 million and 14 million policyholders will be eligible for stock, cash or some other consideration.
Policyholders will change from member ownership to stock ownership without any change in insurance benefits, a spokesman said. The 125-year old Prudential has long sold primarily life insurance but now also offers annuities, a real estate brokerage, property and casualty insurance and investment management. An IPO will restructure the insurer to help it better adapt to the competitive financial services environment as well as providing Prudential with currency for acquisitions, the spokesman said.
"This will be big and will touch a lot of Americans," said Salomon's Devine. "They are giving away $20 billion and most people are not going to believe it's for real."
Analyst expect that policyholders may receive up to $2,000 each from the Prudential demutualization, in either cash, stock or some other options
"This is just like Ed McMahon showing up at your driveway during Christmas," Devine said. "This will be a windfall for policyholders."
Metlife gained 94 cents to $28.06 in afternoon trading Wednesday while John Hancock traded at $29.75. 
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Prudential
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