Prudential pulling out of US$35bil AIA deal

The Star Malaysia    Thursday June 3, 2010

HONG KONG: British insurer Prudential plc is withdrawing from a US$35.5bil deal to buy American International Group Inc's Asian life insurance business, American International Assurance Ltd (AIA), paving the way for a potential listing of AIA.

The widely expected move by Prudential yesterday came after AIG knocked back a lower offer from it a day earlier, and would help the British firm avoid an embarrassing defeat at the hands of shareholders next week.

"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," Prudential chairman Harvey McGrath said in a statement. "We are therefore withdrawing from the transaction."

Prudential's Hong Kong-listed shares jumped as much as 7.1% to HK$68, tracking a 6.3% rise in its London-listed shares on Tuesday. But the stock was trading down 0.6% by 0400 GMT, a level at which bulk of the morning trade took place.

A failed deal, which was slated to become the biggest insurance M&A deal in history, is likely to make the position of Prudential's management untenable and increase the call for a break-up of the British insurer, analysts and fund managers have said.

Chief executive Tidjane Thiam, who has been in the job less than a year, had championed the AIA deal, arguing it gives the 162-year-old Prudential a rare opportunity to grab a commanding presence in Asia.

As a result of the withdrawal move, Prudential said it would not proceed with a US$21bil rights offering in London and Hong Kong designed to raise money to finance the deal.

Prudential estimated the cost of the failed AIA transaction so far at about £450mil (US$659mil), which includes a break-up fee of £152.6mil.

The British company did not say that the AIG agreement has been formally terminated but said in the statement it was "expected".

AIG chief executive Robert Benmosche was in favour of accepting the deal on revised terms as it offered more liquidity, and sooner, one person familiar with the situation told Reuters. But the board, which met late on Monday, decided against doing so.

One important sticking point was that AIG's board wanted assurances from Prudential that it would be able to close a revised deal, other sources familiar with the matter said.

Prudential was not able to provide the assurances the AIG board was seeking, the sources said.

The UK insurer originally offered US$35.5bil for AIA, then lowered it to US$30.4bil amid resistance from shareholders that the company was overspending.

AIG is most likely to revive the initial public offering of AIA once the deal is officially terminated. But there are doubts whether an IPO could fetch the same valuation offered by Prudential. — Reuters