Prudential CEO Stakes Job on $35.5 Billion Takeover

Tidjane Thiam, CEO of Prudential Plc
Tidjane Thiam, CEO of Prudential, poses for a photograph following an interview in London. Photographer: Chris Ratcliffe/Bloomberg

Tidjane Thiam kept his job after he tried and failed to buy Prudential Plc when he was strategy director at Aviva Plc. Now that he’s Prudential’s chief executive officer, he can’t afford to fail again.

Thiam, who became CEO of the U.K.’s biggest insurer seven months ago, is struggling to win investor support for the $35.5 billion purchase of American International Group Inc.’s AIA Group Ltd. He may pay with his job, and the 162-year-old insurer itself may be broken up, investors say.

“Given that the CEO and the chairman attached their credibility and careers to this deal, it’s going to be very difficult for them to survive if this deal fails,” said Colin McLean, who helps manage 650 million pounds ($965 million) at SVM Asset Management Ltd. in Edinburgh. McLean sold his Prudential stock earlier this month because he doesn’t support the acquisition.

Prudential delayed the start of a $21 billion rights offering to fund the acquisition last week, raising speculation among investors and analysts that the purchase may founder. The U.K.’s Financial Services Authority temporarily blocked the share sale on concern the combined company won’t have enough capital in reserve to pay policyholders if markets collapse. The delay is the latest of several moves by Thiam, 47, that have angered investors.

The Ivory Coast-born executive was criticized by shareholders in March for agreeing to join the board of Paris- based bank Societe Generale SA, a decision he reversed a day later.

‘Final Straw’

The delay in the rights offering “hasn’t exactly added to one’s confidence” in Prudential’s executives, said Ivor Pether, who helps manage $9 billion at Royal London Asset Management including Prudential shares. It may be the “final straw” for the takeover, said Barrie Cornes, a London-based analyst at Panmure Gordon & Co. with a “buy” rating on the stock.

Investors say they have been given too little information and that Prudential has set unrealistic timelines for the biggest acquisition in the insurer’s history.

The FSA is also wary of approving an acquisition of this size after it approved Royal Bank of Scotland Group Plc’s takeover of ABN Amro Holding NV in 2007, a deal that led to the Edinburgh-based lender’s bailout.

“Our investors are waiting for the prospectus, and we will be publishing it as soon as we can,” Ed Brewster, a spokesman for Prudential, said yesterday.

Changing the Deal

The U.K. insurer and AIG are in advanced talks to change the terms of the deal, cutting the cash component by about $2 billion to win the FSA’s approval, the Financial Times reported today. AIG’s board is weighing the proposal and the prospectus may be published later this week, according to the report, which cited unidentified people close to the situation.

AIG agreed to sell AIA to speed up repayments to the U.S. government, which saved the insurer from collapse in 2008. The New-York based firm said it planned to use $25 billion from the AIA sale to pay down a Federal Reserve credit line that expires in 2013. Before the Prudential bid, AIG had planned to sell AIA to investors in an initial public offering.

Thiam needs 75 percent of investors to support the rights offering, the biggest in U.K. corporate history. The delay of the prospectus prompted Prudential to revise the timetable for the shareholder vote, which was slated for May 27. The company didn’t provide a replacement day.

Thiam’s View

The purchase will make Prudential the biggest international insurer in the fastest growing region in the world and give the company a maturing book of policies that can fund future growth, Thiam told reporters in March. “It puts us in a strong leadership position in all the critical growth markets in the region,” he said.

The FSA is concerned that Prudential may not be able to move capital reserves from Asian countries such as Thailand or Hong Kong should markets collapse elsewhere, two people with knowledge of the situation said last week.

“You wonder about the quality of advice and the procedures that are going on when you get a significant blunder like this,” said Jan Luthman, who helps manage 450 million pounds at London-based Walker Crips Asset Management Ltd., a Prudential shareholder.

Credit Suisse Group AG, JP Morgan Cazenove and Lazard Ltd. are advising Prudential on the purchase. London-based Slaughter and May is the main legal adviser. Spokesmen for Credit Suisse, Lazard, JP Morgan Cazenove, and Slaughter and May declined to comment.

Break Up Prudential

Prudential investors including Cavendish Asset Management Ltd. have said Thiam should consider the possibility of breaking up the company. Investors may receive 24.2 billion pounds, about 75 percent more than the company’s present market value, if the insurer’s existing U.K., U.S. and Asian divisions were sold off separately, Cornes at Panmure Gordon said. Resolution Ltd., the buyout firm founded by Clive Cowdery, is a “ready buyer” for Prudential’s U.K. business, Cornes said.

Prudential shares fell 13 pence, or 2.4 percent, to 541 pence in London trading, giving the company a market value of about 13.7 billion pounds. The 30-member Bloomberg Europe 500 Insurance Index declined 0.5 percent, and Resolution slipped 0.2 percent to 63.35 pence.

This isn’t the first time Thiam’s plans have been stymied. As strategy director for Aviva, he helped orchestrate a 16.9 billion-pound offer for Prudential, the company he now leads, in 2006. Prudential rejected the offer, and Aviva CEO Richard Harvey abandoned it within a week.

Military Coup

Two years later, Thiam joined London competitor Prudential as chief financial officer, serving under CEO Mark Tucker. Before Aviva, Thiam worked in London and Paris as a partner at consultant McKinsey & Co. and spent five years in the Ivory Coast government before it was deposed in a 1999 military coup.

“It’s early days to start saying this raises question marks over Tidjane’s leadership,” said Luthman of Walker Crips. “We’re still inclined to give him the benefit of the doubt. But it’s a huge embarrassment for Thiam and his advisers.”

Investors including Neptune Investment Management Ltd., which owns 0.2 percent of Prudential, have criticized the insurer for not providing enough information to shareholders.

“Very few shareholders have been consulted, and it is not why people bought shares in the Pru,” Managing Director Robin Geffen said yesterday. Geffen has set up a website to encourage other shareholders to support his opposition to the takeover.

Investor Meetings

Thiam and Finance Director Nic Nicandrou went on a series of investor meetings in London, Hong Kong and the U.S. after announcing the takeover on March 1. Thiam was unable to provide investors with any details on AIA’s investments, capital structure or trading beyond the March 1 statement, said one investor, who declined to be named because the meeting was private.

“It’s a big deal and to support a rights offering of that size you need to be confident that the assets you’re buying are being acquired at a very good price,” Pether of Royal London Asset Management said. “That hasn’t really been demonstrated yet. The prospectus will be important for providing more clarity.”

The uncertainty was too much for James Clunie, manager of the 1.5 billion pound U.K. Growth Fund at Scottish Widows Investment Partnership Ltd. in Edinburgh, who sold the fund’s Prudential stock after the deal was announced. Scottish Widows is one of Prudential’s biggest 30 shareholders.

“You sell billions of cheap stuff to buy billions of expensive stuff,” Clunie said. “It’s a bad deal. It doesn’t look sensible.”

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