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Prudential PLC's (NYSE ADR: PUK) much-ballyhooed buyout of American International Group Inc.'s (NYSE: AIG) Asian insurance-unit – AIA Group Ltd. may be on the rocks as the U.K. insurer's shareholders balk at the price.
The proposed buyout calls for Prudential to hand over $35.5 billion to U.S. government-owned AIG. But Prudential's biggest investors are resisting the deal because they believe the company is paying an overly rich premium for AIA, according to sources cited by the New York Post.
Additionally, the method of financing the blockbuster deal puts too much pressure on Prudential shareholders to come up with $20 billion in cash through a rights offering.
Prudential had previously said it would finance the remainder of the deal through a combination of preferred stock, equity securities and loans. Additionally, the structure of the planned rights offering could dilute the stakes of some of Prudential's biggest investors.
The spat between investors and Prudential's board over the steep price led some observers to question whether the company can satisfy enough investors to complete the AIA deal without having to restructure the terms of the sale with AIG.
"This deal is not a foregone conclusion by any stretch," one banker familiar with the transaction told The Post.
Another key concern for some of the Prudential shareholders is whether the company can successfully integrate a business whose value is far larger than Prudential's own $20 billion valuation.
After the deal was announced, some analysts downgraded Prudential's shares because the rights offering could dilute shares up to 11% – 12%, said Societe Generale (OTC: SCGLY) analyst Michael van Wegen.
Astute Money Morning readers probably saw this imbroglio coming. Contributing Editor Martin Hutchinson questioned the deal a day after it was announced on March 1.
"Prudential is paying $35 billion for AIA, which is $15 billion more than the $20 billion AIA was thought to be worth as a stand-alone business. To buy it, Prudential is going to issue shares to AIG, as well as undertaking a $20 billion share issue that will double its capital and dilute the hell out of existing shareholders," Hutchinson wrote. "In other words, it's just about as bad a deal as possible for existing Prudential shareholders."
Even though Prudential has been eyeing the purchase of AIA since last year, some observers believe the decision to go ahead with the deal was a hasty reaction to news that underwriting teams from Deutsche Bank AG (NYSE: DB) and Morgan Stanley (NYSE: MS) were ready to spin off AIG's giant Asian insurance unit in a public offering on the Hong Kong Stock Exchange. That deal was expected to bring in around $15 billion.
Some investors felt Prudential's CEO, Tidjane Thiam, wanted to make the deal to make a splash, signaling a change of direction at the venerable British company after years of sluggish growth in its core U.K. markets. The move was Thiam's first acquisition in his five-month tenure.
"Transformational is an overused word, but this deal is truly transformational," Thiam said when he announced the deal.
Recently, Thiam has been increasing his efforts to convince shareholders and regulators about the merits of the AIA/Prudential combination, The Post reported.
The AIA deal represented a big step forward in AIG's effort to work its way out of the massive debt it owes to the U.S. taxpayers. The government injected $182.5 billion in bailout funds into the company to prevent its collapse.
If the deal is completed, AIG will pay $25 billion to the U.S. government, which currently owns 80% of the beleaguered insurer.
News & Related Story Links:
- New York Post:
AIG sale of Asian unit held up by Prudential UK
- Money Morning:
Prudential-AIG Deal Another Case of Corporate Empire Building
- Money Morning:
Prudential Takes Control of Asian Insurance Market With Purchase of Foreign AIG Unit
Prudential confirms to buy AIG Asia for $35.5 billion