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U.K.'s Pru Seeks Price Cut in AIA Acquisition

Source: WSJ

Posted on 28 May 2010

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U.K. insurer Prudential PLC is in talks to cut the price of its $35.5 billion acquisition of American International Group Inc.'s largest Asian life-insurance unit, as the deal—which would help AIG pay back U.S. taxpayers—faces danger of collapse.

The talks are focused on finding a price that would be acceptable to both Prudential's restive shareholders and AIG, people familiar with the matter said. Some of Prudential's top shareholders, including BlackRock Inc., Legal & General and Fidelity, are clamoring for a new price as low as $30 billion, or about 15.5% less than the original price, one of the people said. Prudential PLC is unrelated to Prudential Financial Inc. of the U.S.

It is unclear how big a price cut AIG and the U.S. government, which owns a nearly 80% stake in the insurer, would stomach. AIG leadership would have to answer to government overseers for accepting any less, but they may argue a lower-priced deal beats the alternatives.

An AIG spokesman said: "We have a signed agreement with Prudential, and we expect them to use their best efforts to live up to it."

A chorus of disapproval from Prudential's top shareholders over the original deal continued Thursday, a little more than a week before a deadline for them to vote on it. Prudential's shareholders are concerned about not just the price, but also the risks of executing the transaction and the $21 billion of cash they would need to put up to help pay for it, they say.

Even if the two sides can agree on a new price, the deal is likely to be delayed as Prudential and its bankers redo the prospectus for investors. Shareholders had been scheduled to vote on the deal June 7, with the $21 billion share sale, known as a rights issue, beginning the next day. Prudential has been aiming to close the acquisition in the third quarter of this year.

A lower price tag for the unit, AIA Group Ltd., would be a setback in AIG's efforts to repay some of the $132 billion in government aid it has received in a bailout starting in September 2008. The AIA deal was expected to generate as much as $25 billion of cash that would go to repaying the Federal Reserve Bank of New York, plus $10.5 billion in Prudential equity that it could sell over time to help repay the Fed bank.

If the Prudential deal falls through, AIG's most likely option would be to revive an earlier plan to list AIA on the Hong Kong Stock Exchange.

But the Hong Kong IPO was expected to raise about $10 billion-$20 billion, far less than what the Prudential deal promised. Meanwhile, tumultuous market conditions in Hong Kong and elsewhere could weigh on the valuation of AIA in the public markets, and any listing would also face competition from a flood of shares that Chinese banks are planning to issue in coming months.

"The risks are pretty meaningful," said Angelo Graci, managing director of Chapdelaine Credit Partners in New York, noting that a failed deal would prolong AIG's restructuring.

"Anything north of $30 billion in a negotiated sale [to Prudential] would still be a big win for AIG as long as they can execute the deal," he said.

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Failing to complete the deal could be devastating for Prudential and its 47-year-old chief executive, Tidjane Thiam. The fast-rising star, a native of Ivory Coast became CEO last October, after rising to the top of the insurance business in an eight-year sprint. He launched the AIA bid just five months after taking the top spot.

The goal was to transform the 162-year-old British insurer by tapping the fast-growing life insurance market in Asia. Now, Mr. Thiam and Prudential Chairman Harvey McGrath could find their positions in jeopardy should the deal fall apart, investors say, though shareholders may not relish the prospect of even more tumult should the transaction fail.

Also providing cover for the Prudential management: the company's board approved the AIA bid.

Prudential faces a high bar in winning shareholder approval for the deal. Investors holding three-quarters of the shares that vote must approve it. With turnout expected to be as low as 60%, as little as 15% of the outstanding shares could be enough to block the deal. At AIG, a decision to change the AIA deal substantially would likely need approval from the New York Fed, according to

The deal has been under siege from the beginning. Early on, some shareholders questioned the price tag and the enormous rights issue needed to make the deal happen. Prudential then faced an embarrassing 12-day delay to the rights-issue timetable, as its U.K. regulator balked at the amount of capital it proposed to hold after the AIA deal.

Prudential got some glimmers of good news Thursday, when proxy adviser Glass, Lewis & Co. said the financing and the deal are in the long-term interests of Prudential shareholders.

Li Ka-shing, the billionaire chairman of Hong Kong conglomerate Hutchison Whampoa Ltd., also said Thursday that he would commit about $200 million to support Prudential's rights offering.

That came days after a Glass Lewis rival, RiskMetrics Group, recommended shareholders vote against the takeover, citing the high cost of capital, integration risks and profit targets that would be difficult to achieve.