Pru bosses hold regulator talks as clock ticks

LONDON Fri May 7, 2010 9:36am EDT

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LONDON (Reuters) - Prudential (PRU.L) bosses will hold high-level talks with British regulators on Friday, sources said, stepping up negotiations as time begins to run out for its planned $35.5 billion acquisition of AIG's Asia arm.

Insurer Prudential -- forced to delay details of a $21 billion cash call on Wednesday after an embarrassing last-minute regulatory snag -- will step up contacts with the regulator before the weekend, people familiar with the matter said.

Chairman Harvey McGrath and chief executive Tidjane Thiam were due to meet Financial Servics Authority boss Hector Sants later on Friday, one of the sources said, hoping for a swift end to the hiatus and an eleventh-hour rescue for the deal.

The FSA and Prudential declined to comment.

McGrath and Thiam, who has been in the job less than a year, are widely seen as the architects of the takeover of American International Assurance (AIA), the most audacious deal since the credit crunch.

Both now face an uphill task to restore credibility with investors and would struggle to retain their jobs if the deal were to fail, analysts and investors said.

Adding to its regulatory woes, world markets continued to tumble on Friday on worries over euro zone debt, leaving Britain's largest insurer to finalize its bumper rights issue against the background of volatile markets and increasingly mutinous shareholders -- both poor ingredients for success.

"I was positive about the deal before, but a lot of that rested on management credibility," one top 20 investor said.

"If it was a small deal, the consequences of things going wrong might not be fatal. But with something like Pru where you are basically buying something the same size as you are in a market that most investors are less familiar with -- the scope for anything going wrong is (increased) by that much more."

Another top 20 shareholder said he was no longer confident the deal would go through.

"The fall in the market just makes this even more difficult and the market is not interested in writing such a large cheque," he said. "I think the deal is dead in the water. The shares would be weaker if the market thought the deal would go ahead -- shares would have been somewhere around 450 pence rather than 550 pence."

Prudential shares were trading at 540.5 pence, down 1.6 percent at around 1315 GMT (9:15 a.m. EDT).

SUBORDINATED SOLUTION?

One of the sources said the FSA's concerns about capital were heightened because Asian regulators did not want Prudential to take around 1 billion pounds ($1.47 billion) a year out of AIA subsidiaries in the region.

Prudential wanted to use Asian cashflows to boost the group's insurance group directive (IGD), a pot of extra cash British insurers hold in reserve to cover payments to customers in times of economic hardship.

With access to the Asian cashflows uncertain, the FSA refused to allow Prudential to use them toward its IGD, the source said.

As an alternative, Prudential proposed swapping some of the 5 billion pounds of senior debt underwritten by Credit Suisse, HSBC and JP Morgan into subordinated capital.

The three banks also agreed to provide another loan in case the IGD dropped to a level that made the FSA uncomfortable, the person said, but the FSA has still not approved the plan and further changes could be necessary.

Subordinated capital counts toward the IGD, while senior bank debt does not, analysts said.

Prudential confirmed on Friday it would revise all aspects of its rights issue timetable, including its shareholder meeting, Hong Kong listing and secondary Singapore listing.

(Additional reporting by Clara Ferreira-Marques; Editing by Dan Lalor)

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