Pru gets in principle nod for AIA buy: sources

A security guard is silhouetted in front a Prudential office in London March 1, 2010.

LONDON/NEW YORK (Reuters) - UK regulators have agreed in principle to Prudential Plc's $35.5 billion purchase of AIG's Asian life insurance unit, sources familiar with the situation said, and the British insurer hopes to price its bumper rights issue within days.

The UK's largest insurer was thrown off its schedule to buy American International Assurance (AIA) last week, when the Financial Services Authority (FSA) blocked the deal in the last minute on concerns over Prudential's capital base.

The FSA had yet to give its final approval for what many see as one of the most audacious deals since the start of the credit crunch, and bankers in late-night talks were ironing out the last wrinkles between the two companies.

But the watchdog had agreed in principle after financial terms had been tweaked, the sources said, resulting in a smaller cash component for AIG, but not a lower overall price.

"The FSA has signed off on the plan. We could price the rights issue very soon," said one of the sources.

But he did not say whether the UK Listing Authority had yet approved the deal, which could still delay the issue of the prospectus for the $21 billion rights issue.

The stakes are high for all sides. Prudential is facing an uphill struggle to restore some credibility for Chief Executive Tidjane Thiam, who agreed to pay top dollar for a company larger than his own. The deal is also key to AIG's efforts to repay the U.S. government after a $182.3 billion bailout.

An American International Group Inc spokeswoman declined to comment. Prudential was not immediately available late on Wednesday. The sources are anonymous because these talks are not public.

DEAL STRUCTURE

Prudential and AIG were ironing out final details of a restructured deal, another source said.

Under the terms being discussed, AIG would cut the $25 billion cash component of the deal by $2 billion without changing the overall price, the source said.

Prudential would issue hybrid securities for $5 billion and AIG would backstop $2 billion of that offering, the source said.

But if Prudential is able to raise the funds in the market without using the AIG backstop, then AIG would still get the original amount of cash, the source added.

The large cash component of the deal was a huge draw for both AIG and the U.S. government, as it allows the bailed-out insurer to more quickly pay back taxpayers for its rescue. In fact, AIG has been hoping the deal would help bring it to a point where it can look for ways to completely repay the government.

In taking Prudential's offer, AIG abandoned advanced plans for an initial public offering of AIA. It could revive those plans if the deal still falls through.

The FSA approval is only one of the hurdles Prudential must overcome to close on the deal. The British company needs 75 percent of investors to approve the takeover, but it has faced growing pressure from shareholders, whose concerns have increased following the delay.

AIG's shares closed down 3.5 percent, while Prudential closed up 4.5 percent.

(Reporting by Victoria Howley and Douwe Miedema in London, and Paritosh Bansal in New York; Editing by David Gregorio, Gary Hill)