British insurer Prudential says it is pulling out of negotiations to take over AIA, the Asian arm of US insurer AIG, after failing in its bid to secure a lower price.
REUTERS - Britain's Prudential has abandoned its plan to buy AIG's Asian life unit AIA for $35.5 billion, bowing to shareholder criticism over the price it had agreed to pay and leaving its management under fire.
Prudential's move on Wednesday was widely expected after bailed-out U.S. giant American International Group refused to cut the price, turning down a last-ditch effort from Britain's largest insurer to simultaneously appease shareholders' concerns over price and seal the deal.
"We listened carefully to shareholders over the price and initiated a renegotiation of the terms with AIG. Unfortunately, it has not been possible to reach agreement," Prudential Chairman Harvey McGrath said in a statement.
"We are therefore withdrawing from the transaction."
For AIG the collapse of the sale means it must weigh up its options which include a potential return to its previous plan to float off American International Assurance (AIA) with a record initial public offering that was once reckoned to be worth up to $15 billion.
For Prudential, however, the end of the botched takeover effort left its strategy open to question, with both Chief Executive Tidjane Thiam and McGrath seen as having personally spearheaded the plan that would have made it Asia's largest foreign-owned insurer.
Both will spend much of Wednesday speaking to the insurer's top investors, smoothing ruffled feathers and hoping to dampen revived talk of a break-up of Britain's top insurer.
They will also have to explain away the hefty 450 million pound ($653.8 million) cost of the failed deal, including a break-up fee, the impact of currency hedging and other costs.
"Management are in a very difficult position given the turn of events that have unfolded. We would like them to set out the strategy for the next one to three years and then make a judgment from there," one top investor told Reuters.
Prudential's London-listed shares jumped on news of the likely withdrawal on Tuesday, but were down 3 percent at 558 pence by 0900 GMT on Wednesday.
Shareholders to meet
Prudential's retreat will mean it has avoided a highly embarassing public defeat at the hands of shareholders, who were due to vote next Monday on the deal and a $21 billion rights issue to help fund it.
Shareholders will still meet next week, however, in a gathering that is now expected to provide the first opportunity for many to quiz management on what went wrong, and why.
One key question will be how long Thiam, in the top job at the Pru for less than a year, can remain at the helm.
"The risk is the company is rudderless, lacking leadership," analyst Marcus Barnard at Oriel Securities said. "They have incurred a net 450 million of costs, after the effect of currency hedging which would probably have given them between 300 and 500 million of pounds -- so you have basically spent 750 million to a billion pounds of shareholders' money and you have nothing to show for it. It's a tough one."
Thiam, a former Ivory Coast government minister, was toasted in the industry when he was named as chief executive, but his execution of the Asian deal has been widely criticised as flawed. Investors and analysts have pointed to errors including a regulatory hitch that caused an unprecedented delay in launching a rights share offer this month.
Thiam had argued the AIA deal would give the 162-year-old British insurer a rare opportunity to grab a commanding presence in Asia. But shareholders said the deal was simply too costly, pointing to the risks associated with integrating employees of two fierce insurance rivals in Asia.
Prudential said it would not proceed with the planned rights offering in London and Hong Kong.
The original deal was valued to $35.5 billion but Prudential then lowered its offer to $30.4 billion.
AIG Chief Executive Robert Benmosche was in favour of accepting a revised offer as it offered more liquidity than alternatives of not selling to Prudential, and sooner, one person familiar with the situation told Reuters.
But the AIG board, which met late on Monday, decided against doing so. One important sticking point was that AIG's board wanted assurances from Prudential that it would be able to complete a revised deal, other sources familiar with the matter said.
Prudential was not able to provide those assurances, said the sources, who declined to be identified.
AIG may now revive a planned initial public offering of AIA. But there are doubts whether an IPO could fetch the same valuation as that offered by Prudential.
There is also the issue of timing the market so as not to clash with a flood of Chinese bank capital-raisings slated to hit the market later this year.
AIG took advice from Citigroup, Morgan Stanley, Goldman Sachs, Blackstone and Deutsche Bank.
Credit Suisse, HSBC and JPMorgan Cazenove were leading Prudential's rights issue as joint sponsors, global co-ordinators and bookrunners.
Date created : 2010-06-02