Prudential Financial Inc. said yesterday it plans to sell its minority stake in retail brokerage Wachovia Securities to Wells Fargo and has applied to tap into the Treasury's capital purchase program.
According to a filing with the Securities and Exchange Commission, Prudential's stake in Wachovia Securities was valued at more than $3.7 billion, after tax, as of 1January, 2008, excluding the AG Edwards Inc. business. It expects the closing of the transaction by 1 January 2010.
Prudential combined its retail securities brokerage with those of Wachovia Corp. in July 2003 to form the St. Louis-based Wachovia Securities. As of 31 December 2007, Prudential owned a 38 per cent interest in the venture, while Wachovia owned the remaining 62 per cent.
The Newark, New Jersey-based insurer said it intends to exercise its right under a "lookback" option to divest its joint venture interests in Wachovia Securities to Wells Fargo & Co., which is acquiring Charlotte-based Wachovia Corp.
The company elected a "lookback" option when Wachovia bought AG Edwards Inc. in October 2007. The option lets Prudential decide whether or not to make a capital contribution to avoid or limit the dilution of its ownership interest in the joint venture. At the end of the lookback period, Prudential has the option to put its interests to Wachovia based on the appraised value of the joint venture, excluding AG Edwards' brokerage business.
Prudential also confirmed that it applied for an investment under the government's capital purchase program, which would result in the US Treasury Department receiving preferred equity in the company. The company did not say how much it is seeking from the government, nor has any determination been made with regard to its participation in the program.
Prudential told investors on a conference call today the application wasn't prompted by a need for liquidity, which is ''ample,'' and that it plans to ''deploy'' any government capital it may get. Federal officials have encouraged recipients of government funds to use it for new lending that might help revive the economy.
As part of its $700 billion financial rescue package passed in September, the government poured $125 billion through stock purchases into nine large financial companies, and made another $125 billion available to other banks. Several banks have already received money under the program.
The company joins smaller insurers Hartford Financial Services Group Inc. and Principal Financial Group Inc. in seeking a portion of the government's bailout fund, originally targeted at banking companies. No. 1 MetLife Inc. has declined to comment on whether it will seek US funds.
Many insurers, including Prudential, have been under pressure to maintain solid capital positions to avoid damaging downgrades by ratings agencies. Keeping high ratings is key for insurers because lower ratings can raise borrowing costs, and in some cases could even mean lost business.
MetLife sold $2.3 billion in shares in October to boost finances, while Hartford, cut its dividend and raised $2.5 billion by selling debt and equity to Allianz SE.
Prudential CEO John Strangfeld is seeking to strengthen finances as real estate investments sour and the stock market slump hurts variable annuity results. To that end, he suspended share buybacks and cut the dividend in half after Prudential posted a $166 million net loss in the third quarter.
On Monday, Fitch Ratings cut Prudential's senior debt rating to "A-" from "A" and the financial strength ratings of Prudential's life insurance subsidiaries to "AA-" from "AA." All of the ratings are investment grade; the rating outlook is negative.
In October, Prudential reported a third-quarter loss due to financial market turmoil and withdraw its forecast for the remainder of the year. Of the insurer's three divisions, its investment division reported the largest decline - a loss of $92 million, compared with a year-earlier profit of $311 million.
Prudential shares rose 63 cents, or 3.1 per cent, to $21.17 Thursday. Shares have traded between $13.10 and $93.14 in the past 12 months.