June 1, 2010 / 5:41 AM / 9 years ago

Pru deal near collapse as AIG snubs lower offer

LONDON/NEW YORK (Reuters) - Prudential Plc’s bid for AIG’s Asian unit was close to collapse on Tuesday after the British insurer failed to secure a price cut, triggering talk it might itself become a takeover target.

The sun reflects in a window above the raised lettering of the former Prudential Assurance building in the City of London May 28, 2010. REUTERS/Luke MacGregor

Tidjane Thiam, Pru’s new boss, had faced rising shareholder discontent over the agreed $35.5 billion cost of buying American International Assurance (AIA), forcing the 47-year-old to ask for a $5 billion reduction.

But AIG’s statement early today that it would stick to the original terms left Thiam with little prospect to save the deal he launched after just six months in the top job.

One important sticking point was that AIG’s board, which met late on Monday, wanted assurances from Prudential that it would be able to close the deal with a reduced price, sources familiar with the situation said.

But Prudential was not able to provide the assurances AIG’s board was seeking, said the sources, who declined to be identified because the talks are not public.

Chief Executive Robert Benmosche told employees in an internal memo obtained by Reuters that AIG would have several options to consider regarding AIA — more than it did in March.

AIG, nearly 80 percent owned by the U.S. government, also would have more flexibility regarding timing, he said.

These options include selling parts of the AIA business by geography, two of the sources said.

AIG’s shares closed down 3.2 percent at $34.25.

Prudential shares closed up 6.3 percent at 571.25 pence, fueled by hopes a $21 billion cash call to fund the takeover will not now go ahead.

“The good thing would be for the Pru to withdraw gracefully,” said Paul Mumford, senior fund manager at Cavendish Asset Management. “If they do put it to a vote, I’d be very surprised if shareholders vote it through.”

Prudential said it would make a further statement “when appropriate.” Its top management is talking to its leading shareholders ahead of a final decision on the board, which could come later on the day or on Wednesday.

Before making a decision, Prudential wants to clarify whether it is legally obliged to go ahead with a shareholder vote on the deal planned for June 7, even if it cancels the deal, other sources familiar with the situation said.

The likely demise of the world’s biggest takeover so far this year means a big hit in fees and a reputational blow for the many investment banks involved.

JUMP TO ASIA

Prudential was forced to reopen price negotiations with AIG last week as it feared it might fail to attract the required 75 percent shareholder approval.

The unraveling of the insurance sector’s biggest-ever takeover could revive speculation of a break-up bid for the group, analysts said.

“Shareholders must decide whether to remain active and push for a break-up of the group, or to leave the business to run as it does today,” Redburn Partners Lance Burbidge wrote in a note.

Analysts said while Prudential may attract bid interest in the wake of a collapse in the AIA deal, a lack of well funded buyers makes imminent approaches unlikely.

“There’s a possibility of that in the medium to long term, but I don’t see it in the short to medium term,” Panmure Gordon analyst Barrie Cornes said. “I don’t think there are any obvious takers.”

Failure would also cast doubt over the future of Chief Executive Thiam, who has been described as arrogant by investors.

“Pru will have to explain to us what is strategic plan B,” said one shareholder, speaking on the condition of anonymity.

“You are probably talking about putting the company under strategic review and maybe not under the current chief executive.”

Thiam’s handling of the bid was called into question last month when Britain’s Financial Services Authority ordered it to boost its capital position, forcing a last-minute delay of publishing details of its cash call.

And less than three weeks after launching the deal, the former McKinsey executive and former Ivory Coast government minister was forced to back away from taking a seat on the board of French bank Societe Generale, after shareholders complained that his new role would distract him from the mega-deal.

A failure of the AIA takeover also poses a problem for AIG’s Benmosche, who wants to use the proceeds of the AIA disposal to repay part of the $182.3 billion bailout the U.S. insurer received at the height of the financial crisis.

The AIA deal, along with another $15.5 billion sale of American Life Insurance Co (Alico) to MetLife Inc, would have brought AIG closer to completely repaying taxpayers. Now those plans would be set back if the AIA deal fails.

“Our overall strategy remains unchanged,” Benmosche said. “We remain focused on monetizing AIA and Alico as quickly as possible so that we can make good on our commitment to repay taxpayers.”

(Additional reporting by Douwe Miedema, Clara Ferreira-Marques and Raji Menon in London, and Kristina Cooke in New York.)

Reporting by Myles Neligan and Paritosh Bansal. Editing by Michael Shields, Louise Heavens, Karen Foster and Robert MacMillan

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