Prudential Insurance Company of America has inked a deal to acquire $7.5 billion in pension obligations from Verizon Communications Inc.
The transfer of the telecommunication carrier’s pension obligations under the Verizon Management Pension Plan to Prudential, Newark, N.J. (NYSE: PRU), is expected to occur in December, Prudential disclosed today.
The transaction calls for Verizon to purchase a group annuity contract from Prudential to satisfy periodic payment obligations to Verizon retirees under the plan; and for Prudential to assume responsibility for the payments.
Prudential says the agreement covers approximately 41,000 Verizon Management Pension Plan participants who retired and started receiving pension benefits before January 1, 2010.
Commenting on the deal, John Nadel and Alex Levine, both analysts at the brokerage firm Sterne Agee, Birmingham, Ala., write in a press statement that they expect Prudential to deploy about $400 million of equity to support the transaction. The investment would likely contribute about $0.12 to Prudential’s earnings per share in 2013, assuming a 13-14% return on earnings.
“A key question is whether [Prudential] has now ‘used up’ all or most of its capital capacity, such that buybacks [of Prudential stock] will be curtailed,” the analysts write. “Similar to [Prudential’s deal with General Motors] announced earlier this year, we believe the typical capital necessary to support a pension transfer is around 7-8% of liabilities at the insurance company level.”
The Sterne Agee analysts go onto express confidence in Prudential’s ability to deliver on the company’s 13-14% return on earnings objective. The vote of confidence assumes, among other things, that Prudential will maintain quarterly buybacks of stock totaling $250 million and that Prudential will deploy $4 billion in capital in 2013 to fulfill aggregate pension transfer obligations.
The Sterne Agee analysts thus maintain a “buy” rating on Prudential stock.