Thiam’s $35.5 Billion Secret Deal Ignites U.K. Regulator’s Wrath

On Feb. 12, 2010, Prudential Plc Chief Executive Officer Tidjane Thiam offered $35.5 billion for AIA Group Ltd. in what would have been the firm’s biggest acquisition funded by the U.K.’s largest share sale. The same day he met the country’s regulator and didn’t mention the deal.

That meeting was the focus of a three-year row between the U.K.’s biggest insurer and the Financial Services Authority that came to a head yesterday when Thiam was punished for a “serious” breach of conduct. The Ivory Coast-born French national, who has almost doubled Prudential’s share price since taking charge in 2009, contested the FSA’s findings, saying they were unwarranted and posed a “grave threat” to his reputation and career before settling.

Thiam, 50, and Prudential’s board decided to keep the purchase secret from the FSA because they were concerned the regulator would leak it to the media, the agency said in a report. FSA officials learned of the deal when they read about it in the press. Prudential was subsequently fined 30 million pounds ($45 million), the fifth-biggest in the agency’s history, and the only one of the FSA’s 10 largest penalties where the firm didn’t receive at least a 20 percent discount for cooperating with the regulator.

“Thiam had numerous opportunities and was repeatedly advised of the need to inform the FSA of the transaction, yet played a significant role in PAC’s failure to do so,” the FSA’s report said. PAC refers to a Prudential subsidiary. “Thiam and PAC remained highly concerned about leak risk throughout the transaction, and this sensitivity clearly affected their judgment about when to inform the FSA.”

FSA Censure

Thiam is the only acting CEO of a FTSE 100 company to receive a public censure, a reprimand from the regulator that stops short of fining or banning. The FSA can also issue private censures that aren’t publicized.

“This is the first time such a large insurer has been fined so much and for not being open and cooperative with their regulator, and only for that reason,” said Chris Finney, a partner at law firm Edwards Wildman Palmer U.K. LLP, who worked for the FSA for nine years until 2011.

Prudential agreed to the fine and Thiam to the censure, the London-based insurer said yesterday in a statement. “Tidjane acted at all times in the interests of the company and with the full knowledge and authority of the board,” Chairman Paul Manduca said in the statement. “The FSA has determined that it should have been informed earlier about the fact we were contemplating the AIA transaction, and we regret, with hindsight, not so doing.”

AIA Deal

Thiam joined Prudential in 2008 as finance director after a career that took him from planning minister in the Ivory Coast to McKinsey & Co. and then Aviva Plc, the U.K.’s second-biggest insurer by market value. The 6-foot, 4-inch Thiam left the Ivory Coast after the government in which he served was deposed in a military coup in 1999.

He began work on the biggest takeover in Prudential’s 164-year history in October 2009 when AIA’s parent, American International Group Inc., was seeking to repay the U.S. government for its bailout in 2008. AIA and Prudential are the two biggest international insurers in Asia, selling life and health policies in some of world’s largest and fastest growing economies such as China, India and Indonesia.

Thiam met with other Prudential’s directors on Jan. 31, 2010, and decided that a “key risk” of the deal, which would require financing by a large share sale, was a leak at a time when the stock market was still recovering from the financial crisis, according to the FSA report. The regulator was “one of a number of parties which might be the cause of a leak,” they concluded, the report said.

Advice Rejected

Credit Suisse Group AG, which was advising Prudential on the takeover, recommended the firm notify the FSA by Feb. 3. The company rejected the advice because it said the takeover talks were “premature” and that AIG preferred to sell AIA in an initial public offering, the report said.

Over the next week, Thiam and then Chairman Harvey McGrath met with AIG CEO Robert Benmosche in London and Washington as they discussed the price of the deal and on Feb. 12 Prudential sent a non-binding offer of $35.5 billion.

That same day Thiam met with the FSA’s insurance division as part of the regulator’s usual supervisory check-ups.

“The FSA asked detailed questions about Prudential’s strategy for growth in the Asian market and its intentions to raise equity and debt capital,” the FSA said in its report. Thiam didn’t say a word about the AIA deal, it said.

FSA Informed

Over the next 10 days, talks with AIG progressed and the U.S. insurer informed Prudential that it preferred to sell AIA to the U.K. firm rather than through an IPO. On Feb. 23, Prudential further delayed its plan to tell the regulator, the report said. Three days later, the company was informed that an article was likely to be published in the press about the deal. The FSA was still not informed, it said.

Prudential finally told the regulator of the transaction on the afternoon of Feb. 27, hours after Sky News published a report detailing the offer for AIA and its price. That left the FSA with “numerous supervisory issues” to consider in a short space of time before the insurer’s planned share sale to raise the money for the purchase, it said.

At 14.5 billion pounds, the share sale would have been the U.K.’s biggest on record, exceeding the 13.5 billion pounds raised by Lloyds Banking Group Plc in 2009. The prospectus for the share sale was due for publication on May 5, about two months after the FSA was informed of the deal.

The tight schedule meant Prudential was unable to satisfy the FSA “that the enlarged group would have a sufficiently resilient financial position, including whether it would have a robust regulatory capital position and whether regulatory capital surpluses held in certain jurisdictions could be applied to meet potential capital demands which might arise in other areas of the group,” the FSA said.

AIA Offering

Prudential delayed the prospectus, and on May 27 investors owning as much as 20 percent of Prudential’s stock were planning to vote against the takeover, according to shareholder Neptune Investment Management Ltd. The firm pulled the offer on June 3 after being unable to negotiate a lower price.

AIG began divesting its AIA stake in a public offering in 2010 and the firm now has a market value of $52.9 billion, 49 percent more than Thiam’s offer. Opponents of the deal including Neptune point to the fact that Prudential’s stock has risen 90 percent since the deal collapsed, proving the firm didn’t need the acquisition. After the deal failed, Thiam focused on expanding the insurer’s Asian division and has lifted the dividend 53 percent since 2009.

‘Serious Breach’

The FSA accused Thiam of a “serious breach” of its rules, which require firms to be open and cooperative in their relations with the regulator. The breach wasn’t “reckless or deliberate,” and Thiam didn’t profit, the FSA said.

In written and oral evidence to the FSA, Thiam denied that he had breached the FSA’s requirements, saying that the FSA had “misunderstood and mis-stated the events.” The sanctions were unwarranted and unprecedented, he said, according to the FSA.

He also said he wasn’t personally culpable for the conduct ascribed to him because until Feb. 28 the transaction was “highly unlikely” and “completely speculative.” The FSA knew of Prudential’s general interest in AIA following a failed bid earlier in 2009, and he acted with the full knowledge of his board and advisers, Thiam said.

The FSA rejected Thiam’s explanation that he wasn’t personally culpable as he “was the individual most closely involved with the progress of the transaction,” it said.

“I know some of my clients think they leak like a sieve,” said Stephen Gentle, a defense lawyer at Kingsley Napley in London, referring to the FSA. “They’re usually the opposite. They are paranoid about confidentiality.”

The FSA fine brings the total cost of the failed bid to 407 million pounds. The firm has said it paid 377 million pounds in fees to lawyers and advisers

A bonus for Thiam this year would be “highly questionable” following a pay revolt on the insurer’s compensation report last year and the FSA’s punishment, said Louise Rouse, director of engagement at ShareAction, a charity promoting corporate governance and responsible investment.

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