Prudential confirms to buy AIG Asia for $35.5 billion

Prudential confirms to buy AIG Asia for $35.5 billion
Myles Neligan
LONDON
Mon Mar 1, 2010 8:32am EST
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A security guard is silhouetted in front a Prudential office in London March 1, 2010. REUTERS/Luke MacGregor

A security guard is silhouetted in front a Prudential office in London March 1, 2010.

Credit: Reuters/Luke MacGregor

LONDON (Reuters) - Britain's Prudential (PRU.L) said it would buy AIG's (AIG.N) Asian life insurance arm for $35.5 billion, making it the undisputed foreign leader in one of the world's fastest-growing financial services markets.

Deals

The acquisition of AIA will be funded by a rights issue of $21 billion including costs and fees, the biggest ever acquisition-related cash call, and by a $5 billion debt issue, Prudential said on Monday, confirming an earlier Reuters report.

The takeover of AIA will make Prudential Asia's biggest foreign insurer overnight, boosting its exposure to soaring demand for financial services across the region as rapid economic growth lifts consumers' spending power, and as growth at home declines.

"Transformational is an overused word, but this deal is truly transformational," Prudential chief executive Tidjane Thiam told reporters.

The takeover will lift the proportion of Prudential's new business profit generated in Asia to 60 percent from 44 percent, while roughly trebling its total Asian customer base to 30 million, the company said.

Investors and analysts said they needed to know more about the finances of AIA before they can judge whether the takeover justifies the rights issue, which will raise a sum close to Pru's current market value of about $23 billion.

"Fifteen billion pounds is a huge amount and I would want to see more details of the kind of return profile and the timetable for that," said one top ten Pru shareholder, speaking before Prudential confirmed the deal.

Prudential shares fell 11.5 percent to 533-1/2 pence by 1312 GMT against a slightly higher FTSE 100 .FTSE. Five-year credit default swaps (CDS) on Prudential widened by around 30 basis points, meaning the cost of buying protection against a default of 10 million euros of Prudential debt over five years rose to around 110,000 euros from 80,000 euros.

Shares in AIG jumped as much as 12 percent in pre-market trade.

DOWNGRADED

Analysts at brokerages Oriel and Panmure Gordon downgraded Prudential's shares.

"It's going to be enormously dilutive," said ING analyst Kevin Ryan.

"No one knows exactly what AIA contains or how profitable it is, or how it overlaps with Pru's existing businesses."

The acquisition, which comes after an initial approach for AIA by Prudential fell through last year after the two sides failed to agree on price, marks the company's first major transaction under the charismatic Thiam, who took over the top job in October.

It will allow AIG to repay part of a $182.3 billion government bailout it received at the height of the financial crisis two years ago. AIG had been preparing AIA for an initial public offering in Hong Kong before opting instead to sell to Prudential.

The Prudential cash call is underwritten by Credit Suisse, HSBC, and JP Morgan Cazenove, who are also acting as bookrunners.

The rights issue is expected to complete in June, and it is a "reasonable assumption" that the new shares will be offered at a discount of about 40 percent, Prudential's Thiam said.

The Pru CEO said AIA's price tag is equivalent to 1.69 times its embedded value, an insurance sector valuation measure which includes the present value of future profits, compared with a typical multiple of 1.7 to 1.8 for Asian insurers outside China.

Pru's own shares currently value it at around one times embedded value, but its Asian business alone is closer to 1.7 times, Thiam said.

Thiam added that Prudential plans to keep its British division "for the foreseeable future," dispelling speculation the business might be sold so the group can concentrate on Asia.

Earlier on Monday, British insurance-focused takeover vehicle Resolution said it was not in talks to buy Prudential's UK arm, countering a weekend press report which said Pru might offload the unit to Resolution as a side-deal to the AIA takeover.

(Additional reporting by Raji Menon and Clara Ferreira-Marques)