The latest on the Prudential/AIG/AIA saga came in the form of a terse statement from the US insurer and parent of the AIA Asian businesses on Tuesday (our emphasis):
American International Group, Inc. (AIG) today announced that, after careful consideration, the company will adhere to the original terms of its previously announced agreement with Prudential plc for Prudential to acquire AIG’s wholly owned pan-Asian life insurance subsidiary AIA Group Limited. The company will not consider revisions to those terms.
That bald statement would appear about as final as it could get, after markets were left somewhat flummoxed last Friday by news that the two sides were renegotiating the deal.
As Bloomberg reports on Tuesday:
Prudential said it had proposed a revision to the terms of its acquisition that would have reduced the price to $30.4bn according to an e-mailed statement from the London- based company today.
The Pru, the FT reminds us was last week forced to try to persuade AIG back to the negotiating table after some of its biggest investors indicated that the UK life assurer would not get the required 75 per cent of shareholder backing to approve its AIA takeover and $21bn rights issue to fund the deal.
Meanwhile, AIG’s majority owner, the US government, had suggested that the Pru’s much-hoped for price cut of about $5.5bn to about $30bn for AIA was too low.
The Pru in a statement on Tuesday morning had this to say (our emphasis):
Prudential plc (“Prudential”) notes the announcement by American International Group, Inc. (“AIG”) that it will not consider a revision to the terms of the proposed combination of Prudential with AIA Group Limited (“AIA”). Following detailed discussions with AIG’s management and advisers, Prudential had proposed a revision to the terms that would have reduced the value of the consideration for the acquisition of AIA by Prudential Group plc (“New Prudential”) to US$30.375 billion, comprising:
- – cash of US$23 billion;
- – approximately 2.16 billion newly issued shares of New Prudential (expected to represent approximately 11.58% of the issued ordinary share capital of New Prudential immediately following completion of the acquisition of AIA) with a value of US$5.375 billion based on the theoretical ex-rights price for Prudential’s ordinary shares of 171.31 pence (calculated on the basis of the closing price for Prudential’s ordinary shares on Friday 28 May 2010 and using an exchange rate of £1:US$1.4466); and
- – US$2.0 billion in aggregate principal amount of perpetual tier one notes to be issued by Prudential (the coupon on which would be at current market rates).
The ordinary shares and tier one notes to be issued would be made more readily marketable (including by a reduction of the lock up on the ordinary shares).
The Board of Prudential is considering its position. A further announcement will be made when appropriate.
According to an early Tuesday note from London broker Olivetree Securities, all this suggests “it makes more sense for them to pull it rather than go to the vote now”. More key points from the note:
- Given Prudential itself admitted that it was trying to alter the transaction price in the face of shareholder feedback, we now find it very hard to see how this deal gets sufficient shareholder support to close.
- … In the light of such aggressive shareholder feedback we think Pru should now announce that the transaction is cancelled, rather than proceed with a fruitless shareholder vote on 7th June.
- Pru would have to pay a break fee of £153mm to walk away from the transaction.
- As a reminder, to approve the deal, 75% of those shares cast need to be in favour – an outcome we find highly highly unlikely having met c50 Prudential shareholders in recent weeks.
- As of the end of last week, there was still a material short base in Prudential, which we would expect to cover on any belief the AIA deal will not happen. Cancelling the transaction removes both the fundamental and rights issue dilution. There was a 12.8% short base on Friday – although not all of this is actually short. Still meaningfully high though.
- We will likely see some M&A speculation introduced into Prudential iteslf, although as we have previously discussed we think this is on a 2 year view at earliest.
- However, it remains likely that Pru shares squeeze somewhat this morning, in the medium term we would need to believe in quick M&A / break up stories to keep this strength – something we remain in need of convincing on.
- conclusions [for now] are that the chances of Pru-AIA proceeding are now very slim and that Pru shares will see some squeeze this morning.
If, as market speculation also suggests, there could be M&A interest in the Pru itself, then settle in for a whole new saga, and spare a thought for Pru CEO Tidjane Thiam, whose considerable headaches up to now really might just be beginning.
As for AIG, as Lex observes on Tuesday, the US insurer might well be better off if the Pru walks away:
Whispers among underwriters suggest AIG could sell just under half of AIA at 1.6 times its disclosed embedded value, netting the group about $15bn. With no forced disposals, and with management and the sales force largely intact, who knows? A reborn AIA might even achieve the heroic assumptions the Pru was making on its behalf. That could allow AIG to sell down chunks at good prices, in an orderly manner. Plenty for chief executive Robert Benmosche and co to chew over.
Related links:
Markets Live discussion on Pru/AIA - FT Alphaville
Watch this space: Pru halts Friday HK trading – FT Alphaville
Pru fights on price to save AIA deal – FT
AIA chief spits dummy over Pru deal – FT Alphaville