Prudential Moves Closer to Its AIG Prize

Prudential (PUK) Chief Executive Officer Tidjane Thiam took 11 weeks to persuade U.K. regulators to authorize the insurer's $35.5 billion takeover of American International Group's (AIG) main Asian unit. He now has three weeks to persuade his investors, who are scheduled to meet to vote on a rights offer on June 7.

Thiam and his management team have started a fresh round of investor meetings as they seek to gain the 75 percent of shareholder support needed to push through the $21 billion rights offer that will fund the takeover of AIA Group, the biggest purchase in Prudential's 162-year history.

The insurance giant issued a prospectus and sought to win over investors by promising to double Asian profits within three years and extract $1 billion from AIA within that period for dividends and investment in growth. "I'm sure Tidjane and the management will get a hard time from some investors, but armed with the information released [on May 18] they will be able to make up for some of the missteps of the last few weeks," says Martin Brown, a Glasgow-based fund manager at Ignis Asset Management. "The targets and disclosures are reassuring and broadly positive."

To gain U.K. regulatory approval, Prudential was forced to sell $5.4 billion of hybrid capital and set up a $1 billion reserve fund. Hybrid capital, which combines elements of debt and equity, is more expensive to sell to investors than the $5 billion of senior debt the insurer had planned to issue. "There is still a risk the deal does not proceed," says Jonathan Jackson, head of equities at Killik & Co., which owns Prudential shares. "The timing of the fund-raising is not ideal given the market's current nervousness over sovereign debt issues."

Neptune Investment Management and other shareholders have criticized Thiam's handling of the deal. Managing Director Robin Geffen says he is trying to rally fellow shareholders to oppose it. "This is something of a leap in the dark for the Pru," says Paul Mumford, who helps manage 417 million pounds, including Prudential shares, at Cavendish Asset Management in London. "This is not about business diversification. This is a case of putting an awful lot of eggs into a Far Eastern basket."

The bottom line: Thiam has cleared the regulatory hurdle. Next he must convince shareholders that the deal is worthwhile—then deliver on that promise.

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