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UK's Pru to buy AIG Asia unit for $35.5 bln
March 1, 2010 / 9:06 AM / in 8 years

UK's Pru to buy AIG Asia unit for $35.5 bln

LONDON (Reuters) - Britain’s Prudential (PRU.L) will buy American International Group’s (AIG.N) Asian life insurance arm for $35.5 billion in the insurance sector’s biggest deal ever, helping the bailed-out U.S. group repay a big chunk of its taxpayer debt.

<p>A security guard is silhouetted in front a Prudential office in London March 1, 2010. REUTERS/Luke MacGregor</p>

Britain’s No. 1 insurer plans to pay $25 billion in cash and the rest in equity for the unit, American International Assurance (AIA). It said it would finance the purchase through a rights issue of $21 billion including costs and fees, a record for an acquisition-related cash call, and by raising $5 billion of debt.

The acquisition of AIA, regarded as AIG’s Asian crown jewel, increases Prudential’s already strong exposure to soaring demand for personal financial services in Southeast Asia as rapid economic growth there lifts consumer spending power, compensating for at-best sluggish growth in Britain.

“Transformational is an overused word, but this deal is truly transformational,” Prudential Chief Executive Tidjane Thiam told reporters. The British company and AIG announced the deal on Monday, confirming an earlier Reuters report.

Hong Kong-based AIA traces its roots to 1919, when Cornelius Vander Starr started a small insurance agency in Shanghai that ultimately grew into AIG.

AIA operates in 15 geographical markets and has more than 23 million in-force policies. It posted an operating profit of $1.4 billion in the year ended November 30, 2009.

Buying AIA will lift the proportion of Prudential’s new-business profit generated in Asia to 60 percent from 44 percent, while roughly trebling its Asian customer base to 30 million.

MASSIVE RIGHTS ISSUE

Investors and analysts said they needed to know more about AIA before they can judge whether the takeover justifies the rights issue, whose proceeds will nearly equal Prudential’s current market value of about $23 billion.

“Fifteen billion pounds is a huge amount, and I would want to see more details of the kind of return profile and the timetable for that,” one top 10 Prudential shareholder said, speaking before the deal was confirmed.

Prudential shares fell 12 percent to 530 pence against a slightly higher FTSE 100 .FTSE, while AIG shares closed up 4.1 percent at $25.78.

“(The deal) is going to be enormously dilutive,” said ING analyst Kevin Ryan. “No one knows exactly what AIA contains or how profitable it is, or how it overlaps with Pru’s existing businesses.”

The Prudential cash call is underwritten by Credit Suisse CSGN.VX, HSBC (HSBA.L) and JPMorgan Cazenove, who are also acting as bookrunners. Prudential advisers on the AIA deal also include Lazard Ltd (LAZ.N).

The rights issue is expected to be completed in June, and it is a “reasonable assumption” that the new shares will be offered at a discount of about 40 percent, Thiam said.

FRESH APPROACH

The acquisition, after an initial approach for AIA by Prudential fell through last year because the two sides could not agree on price, marks the company’s first major transaction under the charismatic Thiam, who took over the top job in October.

AIG, which received a $182.3 billion taxpayer-funded rescue after its near collapse in September 2008, will use $16 billion of the cash portion of the sale proceeds to pay the Federal Reserve Bank of New York for its stake in a special purpose vehicle that holds AIA.

The remaining $9 billion of the cash will be used to pay down the Fed’s credit facility, which has an outstanding balance of about $25 billion.

Under the deal, AIG will also receive $10.5 billion in Prudential shares, giving it a stake of about 11 percent, which it plans to sell to further reduce its borrowings.

AIG is also in advanced talks to sell American Life Insurance Co, a foreign life insurance unit, to MetLife Inc (MET.N) for about $15 billion. Between these two deals, AIG could pay down its entire debt to the Fed and may follow the same path as Citigroup Inc (C.N) out from under the U.S. government’s wing.

AIG had been planning to float AIA on the Hong Kong stock exchange as an alternative to a disposal.

“In considering two viable, very attractive alternatives to successfully monetize AIA, including an initial public offering, we decided that a sale to Prudential enables AIG to realize value on a faster track to repay U.S. taxpayers,” AIG Chief Executive Robert Benmosche said in a statement.

Thiam said AIA’s price tag is equivalent to 1.69 times its embedded value, an insurance sector valuation measure that includes the present value of future profits. He said this compared with a typical multiple of 1.7 to 1.8 for Asian insurers outside China.

Prudential’s own shares currently value it at around one times embedded value, but its Asian business alone is closer to 1.7 times, Thiam said.

He also said Prudential plans to keep its British division “for the foreseeable future,” dispelling speculation the business might be sold so the group can concentrate on Asia.

Prudential on Monday also said its 2009 operating profit rose 8 percent to 3 billion pounds.

AIG was advised by Citigroup, Goldman Sachs (GS.N) and Blackstone Group (BX.N) on the deal, while Debevoise & Plimpton acted as its legal counsel.

Reporting by Myles Neligan; Additional reporting by Raji Menon and Clara Ferreira-Marques in London and Paritosh Bansal in New York; Editing by John Wallace and Steve Orlofsky

Our Standards:The Thomson Reuters Trust Principles.
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