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Prudential Plc Launches $21 Billion Rights Issue to Help Fund AIA Purchase

Source: WSJ

Posted on 17 May 2010

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U.K. insurer Prudential Plc on Monday released details of the sale of 13.96 billion new shares, putting back on track a controversial 14.5 billion pounds ($21.08 billion) rights issue meant to help fund the company's $35.5 billion purchase of AIA Group Ltd., the Asian arm of debt-laden American International Group Inc.

The launch of the rights issue means the company has received the tacit approval of the U.K. Financial Services Authority, which until recently had concerns over Prudential's capital reserves and stopped Prudential from publishing its right-issue prospectus on May 5.

The release of the prospectus also restores hope on the part of AIG that it can pay a huge chunk of the $182.3 billion bailout it got from the U.S. government during the height of the financial crisis.

If successful, the purchase will give Prudential access to an additional 20 million customers and 23,500 staff in 15 countries, turning it into a formidable Asian insurer.

Prudential, which is unrelated to Prudential Financial Inc. of the U.S., said it is selling the new shares at 104 pence each, with investors allowed to buy 11 new shares for every two shares they currently own. The price is an 81% discount to the insurer's closing price of 542.5 pence Friday. It is also a 39% discount to the stock's theoretical ex-rights price, or the projected price for a company's stock after issuing new shares.

The prospectus shows that Prudential will pay AIG through $25 billion in cash, a $5.5 billion equity stake representing 10.9% of the combines entity, a $3 billion mandatory convertible bond, $2 billion in Tier 1 notes and any subordinated notes subscribed to by AIG.

A major change from its March 1 announcement is a standby commitment from AIG to subscribe for up to $1.875 billion of hybrid capital. Prudential also changed its debt-financing arrangements to include a facility for $5.4 billion of hybrid capital. These arrangements are meant to assuage the FSA's concerns over capital in case Prudential faces severe financial stress.

Prudential said the changes to the deal's financing will give it a capital surplus of £5.2 billion after the acquisition, double the £2.6 billion announced in March. It has also arranged for another £1 billion in subordinated debt to boost the capital surplus "in certain stress scenarios."

Prudential said it aims to achieve a pretax operating profit of at least £3.26 billion in 2013 for the combined Asian business. It aims to more than double the combined Asian pretax new business profit to at least £2.8 billion in 2013. The company expects to repatriate $1 billion of capital a year from AIA.

Securing the expected net proceeds from the rights issue is nearly guaranteed, with 30 banks and other institutions underwriting it. Net of costs, fees or expenses, it will raise £13.8 billion, or the equivalent of $20 billion, the company said.

But Chief Executive Officer Tidjane Thiam, whose handling of the AIA purchase has recently been questioned by some shareholders, would first have to fully convince shareholders that the company isn't overpaying and that the AIA purchase would pay handsome dividends in years to come.

"The combined business will be in an excellent position to capture sustainable and highly profitable growth. We have the team, the skills and the discipline to successfully integrate these businesses and achieve the targets we have announced today," he said. "We believe that, through capital management and portfolio rationalization, there will be opportunities for the combined entity to create additional shareholder value over and beyond the revenue and cost synergies identified."

Prudential said its combination with AIA would produce $800 million in pretax revenue synergies in 2013. This is up from the $700 million initially estimated in March. It expects $370 million of cost synergies in 2013, higher than the $340 million announced in March.

Of these targeted savings, $200 million would come from combining the AIA head office with the Asian regional head office of Prudential in Hong Kong, and $170 million from combining in-market life business operations.

The AIA deal and the rights issue need 75% approval in a shareholders' meeting now set on June 7, from the original date of May 27.

Previous media reports said some of Prudential's biggest shareholders—including Capital World Investors, BlackRock Investment Management, Legal & General Investment Management, Fidelity International, Schroder Investment Management and Standard Life Investments—are opposed to, or at least have reservations, about AIA. None of them has openly confirmed or denied its stance on the deal.

Added together, they hold more than 25% of the Pru and therefore have sufficient muscle to trash the deal, which some analysts say is fraught with execution risks even though the end benefit—the entry into more fast-growing markets in Asia—also looks enticing.

But Mr. Thiam said he is confident that the AIA purchase will be approved by shareholders. "Overall, we feel confident that [shareholders] will support this. And we always knew going in, that it will be a long, complex and challenging process. What we're attempting has never been attempted before," he said.

Shares of Prudential were down 0.4% at 541 pence on a slightly higher London market.