Prudential seeks to lower cost of AIA deal: source

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

NEW YORK/LONDON (Reuters) - Britain's Prudential Plc (PRU.L) is trying to lower the $35.5 billion price of a planned deal for the Asian assets of American International Group Inc (AIG.N) amid rising pressure from investors, a source familiar with the situation said on Thursday.

Prudential agreed in March to buy American International Assurance (AIA) -- the insurance sector's biggest deal ever -- helping the bailed-out U.S. group repay a large part of the debt it owed to taxpayers.

But Prudential might not get the votes it needs for a deal, with some shareholders concerned about overpaying. Prudential has just over a week to persuade shareholders to approve the deal and sign up to a $21 billion rights issue to fund the acquisition.

The Financial Times reported earlier that Prudential was hoping the U.S. insurer would accept an offer as low as $30 billion. The report said AIG and the government were considering moving to an earlier plan -- an initial public offering for the unit. One person familiar with the matter told the FT there was "less than a 50/50 chance that the deal with Pru gets done."

The source who spoke to Reuters said it was not clear yet how any negotiation on price would be resolved. It is also unclear whether Prudential's shareholders would back a deal at a lower price.

But a separate source familiar with the matter said he was not currently aware of a renegotiation on the price. Two sources previously told Reuters Prudential had raised the question, but AIG had knocked them back.

Prudential and AIG declined to comment.

KNIFE-EDGE

Prudential's bid for the AIA division was already on a knife-edge, with the UK insurer forced to knock down rumors on Thursday that the offer had already been scrapped.

Talk among traders the insurance industry's biggest-ever takeover was canceled propelled both Prudential's shares and sterling higher, but they later steadied after the company said the deal was on track.

A Reuters poll of 23 shareholders and analysts, however, showed Prudential faces an uphill battle to pull off the audacious acquisition that would make it the biggest foreign-owned insurer in Asia.

The 10 shareholders who took part in the survey together own about 5 percent of Prudential. Five thought the June 7 ballot would go against Prudential in what would be a virtually unprecedented thumbs down for a major British blue-chip that could force out top managers. Four thought the deal would go through and one thought it was too close to call.

If it failed, Prudential would have to pay AIG a break fee of 153 million pounds. It would also face hefty monthly payments if the deal were delayed beyond August 31.

Prudential shares gained as much as 8 percent before settling to close 6.8 percent higher, underperforming British peers Aviva Plc (AV.L) and Legal & General Group Plc (LGEN.L).

Investor skepticism has been fueled by an embarrassing regulatory hitch earlier this month, which forced an unprecedented delay to the publication of takeover details.

ADVISER BACKS DEAL

Analysts and shareholders polled by Reuters agreed the price was the biggest hurdle facing Prudential Chief Executive Tidjane Thiam, who has been in the job less than a year. Of those surveyed, 72 percent thought he was offering too much for AIA.

"I think you'll find this is a common shareholder response and will be key," said one shareholder.

Analysts also note there is a risk Prudential would face problems merging AIA with its own Asian operations, although on the upside they note that, in the end, shareholders of acquiring companies rarely vote down a deal.

Earlier this week, rival voting adviser RiskMetrics told investors to vote against the deal, citing a full price, integration risks and ambitious targets.

The influential Association of British Insurers, whose members control about a fifth of the UK stock market, issued its own warning this week, telling investors to consider their options carefully.

Its "amber-top" notice -- the second strongest option it has in its traffic light warning system -- was "purely a routine reminder," an ABI spokesman said.

"Given the size and the complexity, shareholders need to look at it carefully; it would have been odd if we did not say that," the spokesman added.

(Writing by Paul Hoskins; additional reporting by Victoria Howley, Steve Slater, Tamawa Desai, Douwe Miedema, the European stock market team and Michael Erman in New York; editing by Gerald E. McCormick, David Holmes, Andrew Callus and Andre Grenon)