Prudential in Talks to Renegotiate Terms of AIA Purchase
Discussions between the companies “may or may not lead to a change in the terms of the combination,” Prudential said today in a statement. Chief Executive Officer Tidjane Thiam, 47, was in New York yesterday to make his case to executives that the price for AIA should be cut, a person with knowledge of the situation said.
Thiam is facing criticism from major investors as he asks for $21 billion, the biggest rights offer for an acquisition on record. Prudential’s market value is 13.7 billion pounds ($20 billion). The deal has already been delayed by the U.K. regulator over concerns about the insurer’s capital reserves, and the biggest decline in equity markets since the financial crisis has dampened investors’ enthusiasm for the takeover.
“It’s probably the least ideal market to raise capital,” said James Buckley, a London-based fund manager at Baring Asset Management Ltd. who helps oversee $44 billion, including Prudential stock. “The market is not completely closed for small rights offers, but for major deals like Prudential, it’s inevitably tough.”
F&C Asset Management Plc and Cavendish Investment Management Ltd., which each hold less than 1 percent of Prudential, according to data compiled by Bloomberg, both said they planned to vote against the acquisition today.
Investors owning as much as 20 percent of Prudential stock plan to oppose the takeover at the annual general meeting on June 7, Neptune Investment Management Ltd., a London-based shareholder, said this week. Thiam needs 75 percent of investors to support the rights offer for the deal to succeed.
Pensions & Investment Research Consultants Ltd., which advises investors with about $1.5 trillion in assets, recommended shareholders oppose the Prudential and AIA tie-up. Only three of Prudential’s board members have “recent involvement in significant relevant corporate transactions,” PIRC said in an e-mailed statement today.
RiskMetrics Group Inc. in New York, which advises 70 of the world’s 100 biggest investment managers, is also recommending clients vote against transaction. Glass Lewis & Co., another advice firm, backed the transaction earlier this week.
Deal Too Expensive
BlackRock Inc. and Fidelity Investments are among major Prudential shareholders that have voiced concern the deal is too expensive, said the person, who declined to be identified because the discussions are private. Some shareholders are demanding a reduction to as low as $30 billion, a price AIG’s board is unlikely to approve, the person said.
“We have a signed agreement with Prudential, and we expect them to use their best efforts to live up to it,” Mark Herr, a spokesman for New York-based AIG, said late yesterday.
Speculation the deal would collapse was “unfounded,” Prudential spokesman Ed Brewster said earlier this week. “The acquisition of AIA by Prudential represents a compelling combination that can deliver very attractive long-term returns to our shareholders,” he said.
The U.S. Treasury Department, which helped fund the $182.3 billion bailout of AIG, hasn’t asked the company to find a compromise on the AIA deal, spokesman Andrew Williams said in an e-mail. He commented after the Daily Telegraph reported that the Treasury encouraged the insurer to negotiate to preserve the takeover of AIA.
AIG, which is selling assets to repay the U.S. bailout, had been planning a public offering of AIA until announcing the Prudential deal in March. AIG could return to the public- offering option if Prudential shareholders reject the deal, Jim Millstein, the Treasury’s chief restructuring officer, said this week in Washington.
“It would certainly be a mistake to not be willing to renegotiate,” said Angelo Graci, managing director at Chapdelaine Credit Partners in New York. “There are meaningful risks to going back and pursuing an IPO; it would take longer, and the valuation would have a significant amount of uncertainty.”
AIG is being advised by Blackstone Group LP, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc. and Morgan Stanley, according to data compiled by Bloomberg. Prudential is being advised by Credit Suisse Group AG, JPMorgan Cazenove, Lazard LLC and Nomura Holdings Inc., the data show.
Prudential plans to fund the AIA purchase through the $21 billion rights offer, including fees to banks, $10.5 billion of new shares and other securities and by selling debt. The offer is the biggest in U.K. corporate history.
Capital Research & Management Co., Prudential’s biggest shareholder, would have to pay about 1.89 billion pounds to take up its rights in full, data compiled by Bloomberg show. The next three biggest holders, Blackrock, Legal & General Group Plc and Norges Bank, would pay a total of about 1.96 billion pounds for their full allocation of shares.
Not all Prudential’s directors plan to take up their rights in full, Chairman Harvey McGrath said this week. Michael McLintock, CEO of Prudential’s fund-management unit, would have to pay about 3.4 million pounds to fully back the transaction.
“In uncertain times investors aren’t as willing to take as much risk, and it makes it harder to raise funds for expansion,” said Peter Braendle, who helps oversee about $51 billion at Swisscanto Asset Management AG in Zurich and hasn’t decided whether he’ll back the rights offer. “Investors prefer to have a bit more cash.”
Prudential, which yesterday posted its steepest increase since August, fell 1.1 percent to 541.5 pence in London. The insurer’s share price was 602.5 pence on Feb. 26, the last trading day before the deal was announced.
The combined Prudential-AIA would be 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 will create an entity worth $60 billion by 2013, Thiam said this month.
“The deal raises the question why the company is trying to pursue it if a substantial number of shareholders are opposing it,” said Tom Kirchmaier, a fellow at the London School of Economics. “For me the concerns in the debt market just mirror those in the equity market, and the market might just kill a deal which it considers a bad deal.”