Money Matters - Simplified

AIG says no to Prudential's revised bid

Prudential has bowed to shareholder pressure and cut the amount it is willing to pay for AIA, knocking $5 billion off the price tag to $30 billion.

British insurer Prudential PLC's (PRU.LN) plans to consummate the biggest ever insurance takeover suffered a big blow when American International Group (NYSE: AIG) rejected its attempt to lower the offer for the American giant’s Asian unit.

While the negative response spoils Prudential’s apple cart to become a leading player in rapidly growing Asian market, it also hampers AIG’s own capacity to repay the $182 billion bailout fund that it took from the federal government at the height of the economic crisis.

No revisions in terms
While declining the revised, lower bid, AIG stated that it would stick to the original conditions of the previously announced agreement "after careful consideration."

“The company will not consider revisions to those terms,” AIG stated unequivocally.

Experts opine that AIG’s refusal would, in all probability, kill the deal.

“We believe that the deal will collapse as Pru will be unable to garner sufficient support to proceed with the acquisition,” opined Barrie Cornes, insurance analyst for Panmure Gordon in London.

The reduction in price was attributed to the global stock market turmoil. Prudential's shareholders had complained all this while that the deal is too expensive for the British insurer, given the fact that the company intended to garner cash through a $20 billion rights issue and $5 billion as senior debt.

Earlier in March this year, Prudential had decided to take over Hong Kong based American International Assurance, popularly known as AIA, for about $35.5 billion in cash and stock.

The total consideration included $25 billion in cash, $8.5 billion in face value of equity and equity-linked securities, and $2.0 billion in face value of preferred stock of Prudential, subject to closing adjustments.

Late last month, Prudential entered in parleys with AIG again, this time to reduce the purchase price to $30.38 billion.

The reduction in price was attributed to the global stock market turmoil. Prudential's shareholders had complained all this while that the deal is too expensive for the British insurer, given the fact that the company intended to garner cash through a $20 billion rights issue and $5 billion as senior debt.

Prudential stake’s higher
If the deal between the two insurance giants does not see the light of the day, AIG would turn to an initial public offering of AIA in Hong Kong. That will help it raise money to repay the federal loan.

Again, given the recent market volatility and nervousness, going ahead with an IPO does not make good sense, at least as of now.

But the loss, in the event of a failed deal, appears bigger for Prudential and its chief, Tidjane Thiam.

While the the Chief Executive of Prudential would run the risk of losing his job, the insurance giant may well become the hunted instead of the hunter.

Howard Wheeldon, a senior strategist at BGC Partners in London noted, “Mr. Thiam could indeed fall on his sword. If so — and seemingly with the Prudential growth strategy left in tatters — we may reasonably expect this to be perceived by markets as a perhaps too heavy blow and one that might potentially leave the U.K.-based insurer open and vulnerable to predatory action on itself.”