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Prudential Walks Away from AIA Deal

Source: Financial Times

Posted on 02 Jun 2010

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Prudential on Wednesday said it had decided to walk away from an agreement to buy AIG's Asia business after the board of the US insurer voted against cutting the purchase price from $35.5 billion.

Some Prudential investors were already calling for Tidjane Thiam, the chief executive, to resign on Tuesday for failing to renegotiate the deal.

AIG’s board went against the view of Robert Benmosche, chief executive of the US state-owned financial group, and voted 10-2 against a proposal to cut the price of AIA to $30.375 billion. Instead, it favoured reviving plans for a partial sale of AIA in an Asian stock market listing.

The board’s decision effectively killed the deal, as Prudential investors holding as much as 20 per cent of its shares had signaled they would not support the AIA purchase in a vote on June 7 unless the price was renegotiated. Prudential said in its statement that terminating the agreement with AIG would cost it £152.6m ($225m) in break-up fees. Advisory, underwriting and other fees related to the planned transaction will add another £297.4m.

The British insurer said its strategy to focus more on Asia remained unchanged.

“We entered into this potential transaction from a position of strength in Asia and we view the region as offering excellent growth opportunities for Prudential,” Mr. Thiam said. “We agreed with shareholders that a renegotiation of the terms was necessary given market movements but it has not proved possible to reach agreement.”

Harvey McGrath, Prudential’s chairman, said that while AIA represented an excellent opportunity, “since we announced the potential transaction we have seen significant falls in the markets”

“We listened carefully to shareholders over the price and initiated a renegotiation of the terms with AIG. Unfortunately, it has not been possible to reach agreement so we feel it is in the best interest of our shareholders not to pursue this opportunity. We are therefore withdrawing from the transaction,” Mr McGrath said.

Several Prudential investors said Mr. Thiam and possibly others on the board, including Mr McGrath “would have to go”.

“It will be an early agenda item – who will be the new CEO?” one top 10 investor said. “He [Mr Thiam] can’t blow the strategy and then go back to where they were before. He’s got to go.”

“The market is very torn about the management,” said another big investor. “Nothing is likely to happen immediately. But the management team is not in a good place. It will ultimately cost Tidjane his job, but in time. And there will be calls for a break-up.”

However, one said Mr. Thiam should not carry sole responsibility. “There is a bit of a head of steam behind calls for the chief executive or chairman to go. But the board was strongly behind the deal as well and it wasn’t the board’s fault the market fell.” Prudential returned to the negotiating table with AIG after some of its largest investors warned it would not win the 75 percent support it needed under the original terms.

The revised terms under negotiation had been backed by some of Prudential’s biggest shareholders as well as Mr. Benmoshe and the US Treasury.

Mr. Thiam launched Prudential’s ambitious bid to become a dominant force in Asia’s fast-growing life assurance markets three months ago.

But a growing number of investors questioned the price to be paid and balked at the size of the $21 billion rights issue to finance the takeover.