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Pru Investors Warned 0ff AIA Takeover, AIA CEO Threatens to Quit if Deal Goes Through

Source: Financial Times

Posted on 26 May 2010

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Prudential's efforts to persuade shareholders to back its $35.5 billion takeover of AIA, the Asian business of AIG, have been dealt a blow after an influential voting adviser to investors told its clients to vote against the deal.

RiskMetrics, the international proxy advisory service, issued a critical assessment of the AIA takeover bid, saying while a deal had "a sensible strategic rationale", the Pru was paying a full price.

“A full price, integration risk and ambitious targets that barely meet the cost of capital do not make a compelling combination,” it said. “For this reason, it is recommended that shareholders vote against the acquisition of AIA.”

RiskMetrics, which advises 2,400 clients globally including 69 of the 100 largest investment managers, said the Pru was paying $35.5 billion for a company with $1.6 billion in post-tax operating profits.

“For this to work, profits have to grow substantially beyond the expected cost synergies. Our analysis indicates that Prudential needs very high growth rates at AIA to only meet a reasonable return on invested capital, something that seems a stretch when managing a difficult integration process,” it said.

The Pru disagreed with RiskMetric’s recommendation and said it believed it would hit its targets and create value for shareholders.

Harvey McGrath, Prudential chairman, expressed confidence that shareholders would back the UK life assurer’s $21 billion rights issue to fund the takeover.

Speaking after the debut of Pru shares on the Hong Kong and Singapore stock exchanges on Tuesday, Mr McGrath declined to comment on news that Mark Wilson, chief executive of AIA, has signaled he would quit if the deal goes ahead.

However, the chairman did say that the risks involved in merging the groups were manageable.

Mr. McGrath said that meetings with investors as part of the intensive roadshow for the rights issue had gone well.

“I’m confident that we’ll get shareholder approval [at a vote] on the 7th of June,” he said.

He would not comment on the future of Mr. Wilson, but the Pru later issued a statement.

“We have not had any indication from Mark Wilson that he intends to leave AIA and we will not comment further on speculation,” it said.

“We have every confidence in the strength and depth of the management teams in both businesses and in our ability to deliver an effective integration.”