Prudential Plc, the British insurer buying American International Group Inc.’s main Asian unit, delayed its $21 billion rights offering until U.K. regulators agree the combined company will have sufficient capital.
Prudential, which had planned to start the rights offer today, still expects to complete the $35.5 billion purchase of AIA Group Ltd. in the third quarter, spokesman Robin Tozer said today. He was unable to give a timeframe for when Britain’s largest insurer will start the share sale.
“It’s come out of the blue,” said Paul Mumford, who helps manage 600 million pounds ($908 million) of shares at Cavendish Asset Management Ltd. in London including Prudential. “Everyone was expecting the prospectus to come out this morning. It’s quite embarrassing.”
The delay prompted speculation from analysts that Chief Executive Officer Tidjane Thiam will struggle to complete the biggest takeover in the insurer’s 162-year history. He must win the support of 75 percent of investors at a May 27 meeting as shareholders express concern about the cost and risk of the deal. The insurer may be forced to sell more shares or assets including its U.K. division if regulators force it to hold more capital, analysts said.
“Why has this cropped up so late?” said Barrie Cornes, a London-based analyst at Panmure Gordon & Co. who raised his rating on Prudential to “buy” from “hold.” “Investor confidence will have taken a knock.”
“If the market sees this as a sign that the deal might not happen then perversely the shares could rise,” said Marcus Barnard, a London-based analyst at Oriel Securities Ltd. with a “sell” rating on the stock.
Prudential dropped 9.5 pence, or 1.7 percent, to 549 pence in London trading, giving the company a market value of about 13.9 billion pounds. The stock closed at 602.5 pence on Feb. 26, the last day before the London-based insurer announced the fundraising. AIG fell 0.6 percent to $38.01 in New York Stock Exchange composite trading at 11:40 a.m. Eastern Summer Time.
Britain’s Financial Services Authority has indicated it’s concerned the insurer’s capital may be tied up in different countries, limiting Prudential’s ability to move money from place to place in the event of a so-called stressed scenario, such as a sudden decline in equity markets, said a person with knowledge of the talks, who declined to be identified because the negotiations are confidential. Prudential isn’t in talks with the FSA about raising additional capital, the person said.
Prudential’s capital surplus would fall to 2.6 billion pounds following the AIA acquisition, the insurer said in a presentation to analysts in March. Without AIA, Prudential’s surplus was 3.4 billion pounds at Dec. 31, in addition to the company’s required reserves of 2 billion pounds.
Hong Kong, Taiwan, China and Singapore “may restrict the ability of AIG’s foreign insurance subsidiaries to pay dividends,” to their parent companies, New York-based AIG said in its annual report published in February.
AIG will be entitled to a breakup fee of 153 million pounds if Prudential is unable to complete the purchase, the insurer said in a March 5 filing.
The FSA has tightened its capital rules on financial-services companies following the worst financial crisis since the Great Depression, although none of the major U.K. insurers was forced to raise capital from shareholders during the credit crunch. Toby Parker, a spokesman for the FSA, declined to comment.
British investors including Brown Shipley & Co. Ltd. and Killik & Co. have questioned the price being paid for AIA and the risk involved in such a large acquisition. Separately, Capital Group Cos., Prudential’s biggest shareholder, was last month reported by the Times of London to have held talks with other investors about breaking up the U.K. insurer.
Prudential’s U.K. business “would now appear to be suddenly up for sale,” Cornes said. Resolution Ltd., the buyout firm founded by Clive Cowdery, has said it’s considering buying British insurance assets and plans to build a 10 billion-pound insurer in the next 18 months.
Thiam, who became CEO seven months ago, is betting the purchase of AIA will provide long-term revenue growth in the world’s fastest growing region and offset weaker demand for life insurance in the U.S. and U.K.
AIG planned to sell AIA in an initial public offering after the New York-based insurer to help repay the government bailout it received in September 2008. AIG abandoned the plan after agreeing to Prudential’s $35.5 billion offer on March 1.
Including fees to underwriters, Prudential’s rights offering will surpass the 13.5 billion-pound share sale by Lloyds Banking Group Plc in November. Credit Suisse AG, HSBC Holdings Plc and JPMorgan Cazenove Holdings are managing the offering, which is fully underwritten by 33 banks.