AIG Sale of Asian Unit AIA to Prudential Hits Snag

By Raji Menon and | April 28, 2010

Prudential is facing the makings of a shareholder revolt over its $35.5 billion deal to buy AIA, raising the prospect the deal could fail and adding to pressure for a breakup of the British insurer instead.

Prudential’s bid for AIA — the Asia arm of American International Group — has been masterminded by Chief Executive Tidjane Thiam and would be partly financed with a massive $21 billion share sale.

Newspaper reports on Tuesday said Prudential’s largest shareholder, Capital Research & Management, has reservations about the deal and would prefer a break-up of Prudential. One other top-10 investor also said the deal might struggle to get the required shareholder approval for the rights issue.

“There is a very good chance they won’t get the 75 percent needed — in which case the management would be in a very difficult position; effectively a vote of no-confidence in the strategy of the company,” the top-10 shareholder told Reuters.

“There is merit in the argument that more value might be realised if Pru was broken up. We have encouraged Pru to sell UK business and focus on the Asian business — it’s an argument certainly worth exploring,” that shareholder said.

Capital declined to comment when approached by Reuters.

The Times newspaper reported that Capital is orchestrating a potential break-up of Prudential, of which it owns 12 percent.

Broker Olivetree Securities said typically only 60 percent of shareholders attend big contentious EGMs. “Given Capital currently own 12 percent of the share capital of Prudential — if only 60 percent of the shareholder base attends, Capital’s voting power would be 20 percent — with 25 percent needed to block the transaction,” Olivetree said in a note.

It has lined-up Clive Cowdery’s acquisition vehicle, Resolution, British insurer Aviva and a third, unnamed party to buy chunks of Prudential, the newspaper said.

Aviva and Resolution declined to comment. Prudential said its meetings with shareholders had been “constructive” and the next step is to publish the prospectus for its rights issue, which is expected on May 5.

“Prudential needs to really get out and sell this deal on its merits once the prospectus comes out,” said an industry executive. “Fund managers need to see the prospectus. It is hard to make a compelling view until they have all the data.”

The news boosted Prudential’s shares, by 1 percent to 551.1 pence by 1217 GMT, as markets upped their bets that the dilutive rights issue was less likely to happen. The European insurance index fell 1.8 percent.

Prudential’s cash call is fully underwritten by Credit Suisse, HSBC and JP Morgan Cazenove.

HIGH STAKES

Capital’s reported stance against the deal is likely to sway other large investors, many of whom had fretted over the size of the rights issue, the price that Prudential is paying and the integration risks of the mammoth takeover.

“To hear that Capital is not supportive of the deal will stir this up a lot more,” the top-10 shareholder said.

Prudential’s bid for AIA was a huge shot in the arm for AIG, which received a $182.3 billion taxpayer-funded rescue after its near collapse in September 2008. A collapse of the deal would also be a setback for the U.S. government.

Newspaper reports have speculated Los Angeles-based Capital could be leant on by the U.S. government to back the deal, with which AIG hopes to pay back some of the money it owes.

“The U.S. government could have brought pressure to bear on Capital in private, but can’t be seen doing that now the fund’s position has leaked,” one UK broker said.

An investment banker not involved in the deal said fears the rights issue might flounder were overdone.

“Shareholders always ask for their pound of flesh. The deal is expensive given where Pru is trading but it is underwritten by the company’s banks. Worst case scenario the banks end up with a stake in Prudential, but I don’t think it will come to that,” the banker said.

Capital Research and Management holds an about 12 percent stake. Its holding has grown from just over 10 percent in December last year.

(Additional reporting by Clara Ferreira-Marques, Editing by Douwe Miedema and Andrew Macdonald)

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