More Analysts Warn on Prudential’s $35.5 Billion Deal for AIA

A chorus of opposition is growing against Prudential Plc’s bold $35.5 billion takeover of American International Assurance (AIA), with analysts from Singapore to London flagging risks to the deal just weeks ahead of the critical shareholder vote.

Many analysts have questioned Prudential’s revenue synergy targets, with some describing them as unrealistic. Last week, a Singapore-based consultant said Prudential and AIA’s agency forces showed similar levels, throwing into doubt the synergies projected by Prudential.

The latest to raise concern is shareholder RiskMetrics Group Inc, which asked investors to vote against the deal, although it said that, based on deal and trading multiples, it believed Prudential was paying a fair price for AIA

Prudential, which is asking shareholders for $21 billion through a rights offer to part-fund the acquisition, is facing some opposition to its takeover of American International Group Inc’s Asian life insurance business.

Investors are questioning the price Prudential wants to pay to transform itself into an insurance behemoth in Asia.

CLSA Asia Pacific Markets, one of the brokers not involved with deal, said in a report last week that Prudential’s projected revenue targets and agent productivity gains appeared unrealistic.

“We see no revenue synergy should the two brands coexist and remain in competition. It is already a challenge to retain agents, let alone target a dramatic increase in sales,” CLSA said.

Risk advisory firm RiskMetrics issued a critical assessment of the takeover bid, saying Prudential was paying a high price for the company, which recorded a post-tax operating profit of $1.6 billion for 2009. “A full price, integration risks and ambitious targets that barely meet the cost of capital do not make a compelling combination,” the report said.

But RiskMetrics also highlighted the sensible strategic rationale for the deal. “We believe the deal has a good strategic rationale, based on a combination of transferring Prudential’s ‘superiority’, buying at the time of a rebound in new sales and the benefits of higher scale,” it said.

Prudential declined to comment.

With a shareholder vote due on June 7, rumblings are growing within AIA about the future of its management team and agency force if the deal goes ahead.

A source close to AIA told Reuters that there had been a number of agency team defections to other insurance companies and a materially higher proportion of voluntary staff departures from AIA since the transaction was announced.

AIA declined to comment.

Prudential’s top management is meeting shareholders to sell the deal, the biggest ever in the insurance sector, but many investors remain unsure about the transaction.

Prudential Chairman Harvey McGrath said on Tuesday that he was confident the majority of investors would support the acquisition in a vote scheduled for June 7. The deal needs 75 percent approval to proceed.

Such is the skepticism about the deal that CLSA said Prudential would be better off paying the £153 million ($220.5 million) break fee and walking away.

“Besides, what’s the logic of buying a company when you are going to sell one-third of it,” the CLSA report said, referring to Prudential’s planned sale of AIA’s businesses in India, China and partial divestment in Malaysia.