Terms of the deal call for Prudential to pay the government-controlled insurer $25 billion in cash, $8.5 billion in equity and equity-linked securities and $2 billion in preferred stock for its American International Assurance Ltd. unit, the companies said in statements Monday. That means AIG will be left with a big stake in Prudential, a medium-size U.K. life-insurance and asset-management company.
Following completion of the deal, Prudential said it would seek a share listing on the Hong Kong Stock Exchange in addition to the one it has in London. The companies expect to close the deal by the end of the year.
Prudential shares dove 12% to 529.9 pence ($8.08) in London Monday, in part reflecting a massive share sale the company will hold to finance the deal.
AIG said that over time it would sell the $10.5 billion of Prudential securities it is getting in the deal, subject to minimum holding periods it didn't detail in the statement. That cash will be used to repay any borrowings outstanding under a credit facility with the New York Federal Reserve Bank.
AIG's sale of AIA—along with a separate agreement expected in the next week or so to sell another non-U.S. insurer, American Life Insurance Co., to MetLife Inc.—could ultimately generate proceeds of about $50 billion. Half of that amount has already been earmarked for the New York Fed.
AIG was the single largest recipient of a taxpayer-funded aid in the bailout. The company remains far from weaning itself from the government lifeline it received in 2008. These two deals would cover roughly half the $97 billion AIG is trying to repay the U.S. government.
Government officials like the Prudential deal because it will generate $25 billion in cash to repay taxpayers, versus $15 billion they were hoping to get from an initial public offering of AIA, planned for the coming months on the Hong Kong Stock Exchange.
AIA and Alico are by far the two biggest chunks of AIG that it previously committed to sell as part of its push to pay back U.S. taxpayers, who own nearly 80% of the company following its rescue in 2008 near the worst of the financial crisis. Other sales over the past 14 months fetched a total of $5.6 billion.
The AIA deal would be the largest acquisition since Exxon Mobil Corp. agreed to acquire XTO Energy Inc. for $31 billion in mid-December. The deal, along with last week's deal by Coca-Cola Co. to acquire the bulk of its largest bottler, could also help kick-start what has been a lethargic year for merger-and-acquisition activity so far.
AIG's ability to attract higher bids for the two businesses now, versus the depths of the financial crisis in late 2008, could be seen as a vindication of government officials' decision last year to wait for market conditions to improve before selling the businesses. Still, the company and its units face serious obstacles. They have largely been unable to access the unsecured-debt markets to raise funds, and currently have roughly $41 billion in unused borrowing capacity from the New York Fed and Treasury.
Of the roughly $182 billion the U.S. government has committed to support AIG, it has doled out about $130 billion. Under Chief Executive Robert Benmosche, AIG is working to repay about $97 billion. Of that total, about $50 billion would go to the Federal Reserve Bank of New York, while the Treasury Department is owed $47 billion. An additional $33 billion is to be paid off from AIG-related mortgage assets bought using government funds.
Many recipients of U.S. government aid have repaid taxpayers, including banks that got $130 billion of the $205 billion injected into the industry. Several of the biggest recipients still owe sizable amounts, including lender GMAC Financial Services and auto maker General Motors Co. GM owes $5.7 billion in cash to the U.S. government. The Treasury Department also invested roughly $50 billion more in GM that was converted into a 60% stake in the auto maker.
"In considering two viable, very attractive alternatives to successfully monetize AIA, including an initial public offering, we decided that a sale to Prudential enables AIG to realize value on a faster track to repay U.S. taxpayers," Mr. Benmosche said in one of the statements Monday. (Prudential PLC isn't related to U.S insurer Prudential Financial Inc.)
AIG shareholders appeared to cheer the deal, with its stock rising 13% in premarket trading Monday to $24.77.
Mr. Benmosche has said AIG plans to keep a global property- and casualty-insurance business called Chartis, and its domestic life-insurance and retirement-services business, recently rebranded as SunAmerica Financial Group, as its core businesses after selling off other assets.
AIG also owns a giant aircraft-leasing company, International Lease Finance Corp., but hasn't been able to find a buyer for the entire operation. AIG now is looking to sell off some of the unit's aircraft assets. Meantime, AIG is addressing the unit's difficulty in raising funds in credit markets since the financial crisis. AIG also has consumer-lending and mortgage-insurance units that are struggling to recover following the credit crisis.
The two foreign life-insurance businesses, AIA and Alico, weren't responsible for AIG's financial crisis and near collapse in the fall of 2008, which was caused largely by soured mortgage-linked trades put on by a non-insurance division that specialized in derivatives.
Credit Suisse Group, Lazard Ltd., HSBC and J.P. Morgan Chase & Co. advised Prudential on the deal. Goldman Sachs Group Inc., the Blackstone Group LP and Citigroup Inc. advised AIG. Morgan Stanley advised the New York Fed.
The takeover will be a very large bite for Prudential, since the value of the deal is above the company's own market value, which currently stands at about $23 billion. To pay for the deal, it is planning to tap its own shareholders for cash by asking them to buy about $20 billion in additional shares, and to borrow $5 billion.
But AIA's takeover will catapult Prudential into the ranks of the world's largest insurers and make it an Asian powerhouse. Asia would account for three-quarters of the merged company's value of new business, a way of indicating an insurance company's future profits.
About $16 billion from the cash component of the deal will go to pay off preferred shares in AIA held by the New York Fed. The remaining $9 billion will go to AIG to pay down outstanding amounts under its credit facility from the New York Fed.
As of Feb. 24, AIG owed the New York Fed $25.3 billion under the credit facility. Last year, the New York Fed exchanged another $25 billion of its AIG debt into preferred equity in AIA and Alico.
Plans to sell Alico, which operates mostly in Japan and Europe, have been delayed by an unresolved tax issue and depend on a favorable ruling from the Internal Revenue Service. Despite the hurdles, an agreement is expected within seven to 10 days, people familiar with the matter said.