LONDON Prudential Plc bosses were holding 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.
Britain's largest insurer -- forced to delay details of a $21 billion cash call this week after an embarrassing last-minute regulatory snag -- faces a tough weekend of negotiations, sources familiar with the matter said.
"We're living in the post-credit crunch world where regulators want to show they're in charge and bankers do what they're told," a source with direct knowledge of the negotiations said. "Deals are run by the regulators these days and not by anybody else."
It is unclear whether Prudential will be able to secure agreement in time to publish its prospectus within the first days of next week to get the deal back on track.
Chairman Harvey McGrath and Chief Executive Tidjane Thiam were due to meet Financial Services Authority boss Hector Sants 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 top job less than a year, are widely seen as the architects of the takeover of American International Assurance (AIA), one of the most audacious deals since the credit crunch. Both now face an uphill task to restore credibility with investors.
Adding to its regulatory woes, world markets continued to tumble on Friday on worries over euro zone debt, leaving the Pru to finalize and price 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."
Prudential shares were trading at 537.5 pence, down 2.1 percent at around 1500 GMT.
According to Data Explorers, a company that tracks short selling, the number of Pru shares held short increased 150 percent in the week ahead of May 3, to around 7 percent of the insurer's market capitalization, spiking to 8 percent on May 5, the day the delay was announced.
The FSA's worries have focused on capital, the insurer's ability to withstand stress tests and the complexity of a deal that involves 22 jurisdictions.
One of the sources said the FSA's concerns were heightened because Asian regulators did not want Pru to take around 1 billion pounds a year out of AIA subsidiaries in the region.
Prudential wanted to use Asian cashflows to boost the group's insurance group directive (IGD) capital surplus, a pot of extra cash EU insurers hold in reserve to cover payments to customers in times of economic hardship, the source said.
With access to the Asian cashflows uncertain, the FSA refused to allow Prudential to use them toward its IGD.
As an alternative, Prudential has proposed swapping some of the 5 billion pounds of senior debt underwritten by Credit Suisse, HSBC and JP Morgan into subordinated or contingent capital, sources with direct knowledge of the deal said.
Subordinated capital counts toward the IGD, while senior bank debt does not.
The sources said that the exact composition of the additional capital needed was unclear, but underlined the potential popularity of subordinated debt issued by insurers.
AXA, the French insurer, sold a 1.3 billion euro subordinated bond last month and had an order book of more than 8 billion euros.
The three underwriting 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.
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 Douwe Miedema, Clara Ferreira-Marques, Alex Chambers and Steve Slater; Editing by Dan Lalor and David Cowell)
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