Insurance News

AIG In Flux After Prudential Backs Off AIA Buy

Posted on: June 4, 2010

U.K.-based insurance firm Prudential has called off its pursuit of AIA, American International Group’s Asian business, scuttling a deal worth more than $30 billion.

In response to the deal’s collapse, Fitch Ratings removed its positive ratings watch on AIG Group, saying the move reflects “uncertainty around the company’s future ownership”. Meanwhile, Treasury Secretary Timothy Geithner said American International Group has other options for paying back its $182 billion government bailout.

The announcement from Prudential came a day after the once-mighty AIG refused Prudential’s effort to lower the selling price by $5 billion. (See “AIG Refuses AIA Discount For Prudential.”) Prudential had previously offered $35.5 billion for AIA, but the accompanying fundraising efforts drew shareholder ire. The London-based firm then revised its bid to just under $30.4 billion, and would have included $23 billion in cash, $5.375 billion worth of shares in the combined companies and $2 billion in notes.

AIG shares responded well to the news, rising 2.4%, or 81 cents, to close at $35.06 on Wednesday, while American depositary receipts of Prudential managed to finish the day with a gain of 0.3%, or 5 cents, to $16.58. Elsewhere in the insurance industry, Genworth Financial rose 5%, MetLife added 4.4% and Hartford Financial Services gained 4.3%.

“While AIA was an excellent opportunity, since we announced the potential transaction we have seen significant falls in the markets,” said Prudential Chairman Harvey McGrath.

The company cut its bidding price in an effort to appease dissenting shareholders. The opposition formed an organization called the Prudential Action Group, with the intent of bringing together a no-confidence vote against Chief Executive Tidjane Thiam.

Robin Geffen of Neptune Investment Management, a leader of the investor revolt against the AIA acquisition, said common sense prevailed. “From the beginning it has been an absurdly ambitious attempt by the Pru to buy a large Asian company, at a very high price, with a very unclear strategy,” he said.

Prudential is backing out of a deal it thought would have been transformative since three-fifths of the combined company’s profits would have been generated from Asia. According to London investment managers Charles Stanley & Co., the Pru-AIA combination would have garnered a leading market share in Hong Kong, Singapore, Malaysia, Thailand, Indonesia, Philippines, Vietnam, China and India.

What’s more, Prudential said the deal’s failure would cost about 450 million pounds, or $662 million, which includes a break fee of $230.6 million.

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