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Prudential Fails in Bid to Cut Price of AIA Takeover

Prudential headquarters in London
A pedestrian passes the Prudential logo at the company's headquarters in London. Photographer: Frantzesco Kangaris/Bloomberg

Prudential Plc’s attempt to cut the price of its $35.5 billion takeover of American International Group Inc.’s main Asian unit failed, leaving the biggest purchase in the U.K. insurer’s history on the verge of failure.

Prudential was seeking to lower the price to $30.4 billion, the London-based insurer said in a statement today. New York- based AIG “will adhere to the original terms of its previously announced agreement with Prudential,” it said in a separate statement.

“It’s all over,” said Barrie Cornes, a London-based analyst at Panmure Gordon & Co. with a “buy” rating on the stock. AIG “has effectively killed the deal.”

Prudential Chief Executive Officer Tidjane Thiam was trying to renegotiate the terms of the purchase after investors including BlackRock Inc. and Fidelity Investments said the takeover was too expensive, a person familiar with the deal said last week. Failing to complete the acquisition may stymie Thiam’s Asian expansion strategy and delay AIG’s plans to repay part of its $182.3 billion U.S. government rescue package.

“It’s a dead deal,” said Paul Mumford, who helps manage 417 million pounds ($603 million) including Prudential shares at Cavendish Asset Management Ltd. in London. “The Pru will have to pull back gracefully now. It was a very costly mistake.”

Prudential climbed 34 pence, or 6.3 percent, to 575.5 pence in London, valuing the insurer at 14.6 billion pounds. The share price was 602.5 pence on Feb. 26, the last trading day before the deal was announced.

IPO Plan

AIG may return to its earlier plan for a public offering if Prudential shareholders reject the deal, Jim Millstein, the Treasury’s chief restructuring officer, said on May 26 in Washington. AIG will be entitled to a breakup fee of 153 million pounds if Prudential is unable to complete the purchase.

AIG will push on with the IPO, CNBC reported today, citing an unidentified person familiar with the situation. The deal is expected in October, the TV channel said. Patricia Chua, a Hong Kong-based AIA spokeswoman, declined to make any further comment.

Thiam, who took over as CEO in October, “will probably have to review his position,” said Cavendish’s Mumford, who has opposed the deal since it was announced in March. The original takeover offer included about $25 billion in cash and the rest in securities linked to Prudential shares.

Prudential’s planned revision to $30.4 billion included $23 billion in cash, the insurer said today. Following AIG’s rejection, Prudential’s board is considering its position and a further announcement will be made “when appropriate,” it said.

‘Vote of Confidence’

“We see it as a vote of confidence in the deal, not in the management,” Chairman Harvey McGrath said on May 17. Asked if he would look to replace Thiam if the deal failed, he said, “we will take a view of the unfolding situation as and when it occurs.”

Prudential’s shareholders may now favor breaking up the business, according to Rupert Armitage, head of U.K. equities at Shore Capital Group Ltd. “It leaves them very vulnerable to a break up,” he said in a Bloomberg Television interview. “The chairman and the CEO, having staked their reputations on it, it puts them in an almost untenable position.”

The insurer has units in the U.K., U.S. and Asia and could be worth as much as 24 billion pounds if broken up, according to Panmure Gordon’s Cornes.

Shareholder Criticism

Prudential’s bid was hurt by a series of mistakes in dealing with regulators and shareholders. The 162-year-old British insurer also was trying to pull off a $21 billion rights offer, the biggest for an acquisition in history, at a time when Europe’s sovereign debt crisis was hurting corporate fundraisings worldwide.

Ivory Coast-born Thiam, 47, 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. Prudential was also forced to delay the start of its rights offer in May after the U.K. regulator asked the firm to hold more capital in reserve.

Neptune Investment Management Ltd., a London-based investor, said on May 26 it had garnered 20 percent of shareholders to back its opposition to the AIA purchase. Thiam, who needed 75 percent of shareholders to back the offer, made a failed attempt to resurrect the deal by asking AIG to reduce the price two days later.

‘Bad Deal’

“You sell billions of cheap stuff to buy billions of expensive stuff,” James Clunie, manager of the 1.5 billion- pound Scottish Widows fund, said in an interview in Edinburgh on May 7. “It’s a bad deal. It doesn’t look sensible.”

The combined company would have been the largest life insurer in Hong Kong, as well as in Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam. Paying $35.5 billion for AIA would have created an entity worth $60 billion by 2013, Thiam previously said.

The takeover is the biggest announced in the world this year, according to data compiled by Bloomberg. The collapse of the deal would deprive Prudential’s advisers of as much as 850 million pounds in fees for advising on the purchase and the rights offering.

Prudential is being advised by Credit Suisse Group AG, JPMorgan Cazenove, Lazard LLC and Nomura Holdings Inc. AIG is being advised by Blackstone Group LP, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc. and Morgan Stanley.

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