City of London institution M&G looks ripe for a breakup

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The impending appointment of a new chief executive at M&G is set to rekindle a contentious question: is it time to break up the underperforming FTSE 100 savings and investment group?

The heavy structure of M&G – a £150bn asset management business attached to a nearly £200bn retail and savings division – may no longer be fit for purpose, according to some investors.

Three years after the company was relaunched as an independent business following its split from UK insurer Prudential, some critics argue it should be spun off again.

“Overall, shareholders would prefer to see the company get [more] value of its different parts by dividing it,” said Andrew Crean, equity analyst at Autonomous Research. “Investors want to see the [retail arm’s] annuity business sold. This would reduce the size of the whole business and could generate separate bids for the remaining two parties.

The managing director of a rival London-based asset manager put it more bluntly: “M&G’s integrated model doesn’t work.

A spin-off from M&G would mark a new chapter for a City institution that is one of the UK’s largest asset managers.

Founded in 1931, M&G launched the UK’s first private unitary trust and the country’s first investment savings scheme in 1954. By the 1970s, M&G was a household name in the UK savings market.

British insurer Prudential bought M&G Investments in 1999, combining it with its savings division, before splitting off the wider business two decades later when it decided to focus on Asia and Africa.

“The reason [the asset management and savings businesses] were created together is that it was convenient for Pru, not because it made industrial sense for the company,” the rival chief executive said.

Investors hoped that as a stand-alone company, M&G would be less constrained by bureaucracy. But since the 2019 split, its share price has barely risen.

Until the first half of this year, M&G had suffered from sharp investor outflows, while its culture also came under scrutiny. “It was a long and sad ending,” said an industry veteran. “It’s hard to see from the outside what M&G stands for.”

As John Foley plans to retire as chief executive, analysts said his successor’s priority was to clarify the direction and structure of the group.

“M&G can follow one of three paths. . . Business as usual, sell the annuity business and increase asset management, or start growing again in insurance,” said JPMorgan’s Farooq Hanif.

Culture shock

A potential M&G breakup has often been talked about in city circles, but the start of last year provided a sign that it could materialize.

Listed rival Schroders, which manages £770bn in assets, has begun exploring an offer on M&G Investments, attracted by its private asset business and distribution opportunities. The deal would have created a £1 billion asset manager. But Schroders decided not to make a bid, in part because of concerns about M&G’s culture, according to a person with knowledge of the process.

Several M&G alumni described an atmosphere of animosity between the group’s fund managers and the management team, mostly from Prudential.

“Asset managers as subsidiaries of insurers are a tough place to be,” said a former M&G executive. “The cultures come from very different places. Insurers build around risk avoidance; asset managers need a risk-taking mindset because that’s what investing is. They make quite uncomfortable bedfellows.

Another former employee said Anne Richards, a highly regarded executive who ran M&G from 2016 to 2018, tried to improve the culture but “hit a brick wall of testosterone”. Richards, who now runs rival Fidelity International, declined to comment.

£1,000,000

The combined value of the group if Schroders had made a successful bid for M&G

A deeper malaise developed under Foley, who several people described as a difficult personality to work with. An M&G investor said the chief executive was “a shrewd operator, a bit eccentric and unconventional”.

Several former staff tell stories of stress, sexual harassment and a culture of alcoholism.

In 2017, a former M&G employee was fired for gross misconduct – then sentenced to 16 weeks in prison – after creating fake porn profiles of an intern who rejected his romantic advances.

Allegations of sexual harassment by a fund manager surfaced days before M&G’s 2019 listing. Reviews were launched by law firm Baker MacKenzie and professional services firm PwC, but the results were unclear. have never been made public. “It was very, very quiet,” said another former employee of the PwC culture probe.

In early 2021, M&G chairman Mike Evans resigned, citing stress-related illness. Then, in April that year, chief operating officer Roddy Thomson died by suicide, according to the coroner’s inquest, who said he had become “very stressed about his job”.

M&G said it was “committed to providing an environment where our employees work in a safe environment”.

“Since our split, John Foley has led a company-wide culture and conduct program to ensure our employees uphold these values, making it clear that we have zero tolerance for inappropriate behavior.”

Break with the past

Foley’s retirement is one of many personnel changes investors have tentatively welcomed as a chance to break with the past. Kathryn McLeland joined Barclays in January as chief financial officer and Edward Braham took over as chairman in March.

Some industry watchers see the appointment of Braham, a former mergers and acquisitions lawyer, as a sign that the board will consider a sale or breakup.

However, skeptics have warned that a separation could be difficult to achieve.

M&G as a standalone business

“It’s clumsy to explain, but it’s quite difficult to change,” said one investor. “It’s kind of hard to see how you break it.”

M&G is also a favorite among income funds as it has a dividend yield of over 8% and has recently undergone several share buybacks. A sale of the annuity business would mean a reduction in the dividend.

“I would like to be open-minded about a spin-off of the business,” said one of M&G’s top 10 shareholders. “But it’s a big ask to think that management can create an M&A strategy that would lead to a revaluation of stocks above their peers.”

A person close to the business said M&G should keep the Heritage annuity division because having the insurance arm was an “interesting strategy” that provided permanent capital, a structure considered a holy grail in investing.

But the rival chief executive dismissed that, saying M&G’s ability to attract talent and run an alternative business was not in the same league as US managers such as Apollo and Blackstone.

M&G’s latest results, released this week, showed an encouraging improvement in new business growth, with net inflows (excluding the Heritage annuities unit) of £1.2bn in the first half of 2022, compared to net outflows of £2bn a year earlier. But overall assets under management fell by £21bn to £349bn and pre-tax operating profit fell to £182m from £327m.

Under Foley, M&G has used acquisitions to establish a presence in the UK wealth market, an area that offers higher profit margins than asset management or traditional annuities.

Its flagship PruFund range, which controls £57 billion in assets on behalf of 455,000 clients, is expanding with the launch of a new ‘sustainable’ series under the PruFund Planet brand and with products in Europe. M&G is also expanding its higher-margin private assets business.

But Foley’s successor will inherit a business that has lacked strategic focus and suffered from poor performance, and has yet to deliver on its wealth management ambitions.

“M&G could just keep going, paying out a big dividend,” the industry veteran said. “But he has a lot of reputation to rebuild.”

Another insider warned against dithering: “Now if someone said you would sell M&G at the price it is today, I would say yes because it will probably be worth less in a year or two.”

Additional reporting by Chris Flood in London

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