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London-based Prudential PLC (NYSE ADR: PUK) showed its confidence in Asian market profitability by agreeing to buy American International Group Inc.'s (NYSE: AIG) Asian insurance-unit – AIA Group Ltd.
The news follows AIG'S announcement Friday that it lost $8.9 billion last quarter and would continue to divest assets to repay its billions in debt. AIG was planning on an initial public offering for AIA Group in Hong Kong, but recognized a sale to Prudential as a better deal.
Showcasing its bullish outlook, Prudential will pay $35.5 billion for AIA – $25 billion in cash and $10.5 billion in stock and other securities. The company plans to raise $20 billion in a rights offering and sell $5 billion in bonds to finance the deal's cash portion.
Prudential's deal with AIG is notable for a number of reasons:
- It lifts Prudential high above its closest competition in the Asian financial services market.
- It's the largest acquisition-related cash call to-date. The $20 billion rights offering is almost as much as Prudential's current $23 million market value.
- It's the biggest divestiture by AIG since the U.S. government lent it $182.3 billion in bailout funds.
The move also is Prudential Chief Executive Officer Tidjane Thiam's first acquisition in his five-month tenure.
Turning to Asia for Growth the U.K. Can't Provide
AIA is an "Asian crown jewel," a 90-year-old Hong Kong-based business that services 20 million customers from China to Australia, managing more than $60 billion in assets.
With its purchase, Prudential is giving investors a chance to profit from Asian consumers' growing use of financial services. As the region's economic growth continues, so will the need for Prudential's business.
With U.K. growth falling in the insurance sector, Prudential's move represents a core-market shift for the company. It will be the leading life insurer in Hong Kong, Singapore, Malaysia, Indonesia, Vietnam, Thailand and the Philippines, and the leading foreign life insurance provider for China and India.
Last year, Asia contributed to about one-third of Prudential's sales and half of its profits. This deal would result in 80-90% of Prudential's sales and profits to come from Asia, according to The Financial Times.
"Strategically it's probably the right move [for Prudential]. It puts them in a different league," said Justin Urquhart Stewart from 7 Investment Management in London.
Thiam asserts that Prudential will keep its British operations "for the foreseeable future," and will remain a London-based entity. It will still trade on the London Stock Exchange and seek a dual primary listing in Hong Kong.
Short-Term Effect on Investors
Prudential's Asian expansion is a perfect example of companies taking advantage of promising economic news from China and its neighbors. Although the acquisition will provide solid opportunities for long-term profitability, investors will need patience when waiting for returns. Some analysts downgraded Prudential's shares because the rights offering could dilute shares up to 11% – 12%, Societe Generale (OTC: SCGLY) analyst Michael van Wegen told MarketWatch.
Van Wegen noted that business integration risks could result, as well as issues with regulatory restriction in China and India, where Prudential is already involved in joint ventures and obtaining licenses could be a problem.
"Whilst in the longer term we can see the advantages of this audacious and opportunistic acquisition, on a 12 month view, we think that the shares will underperform," said Panmure Gordon analyst Barrie Cornes.
Prudential shares yesterday (Monday) fell $2.37 a share, or 12.81%, to close at $16.13.
News and Related Story Links:
Prudential confirms to buy AIG Asia for $35.5 billion
AIG Sells Asian Life Unit to Prudential PLc for $35.5 Billion
Britain's Prudential to buy AIA for $35.5 billion
- The New York Times:
British Company to Buy AIG's Asian Unit
- The Financial Times:
East holds promise for Prudential
- Money Morning:
AIG Could Seek Another Bailout as it Struggles to Return to Profitability