Prudential’s Eastern promise

March 1, 2010

(Acquisitions Monthly) Tidjane Thiam unveiled his proposal to transform the Pru into an Asian-focused animal just five months after taking over as chief executive of the stately British insurer. The former Aviva man obviously feels the opportunity presented by state-supported AIG’s effectively forced sale of its Asian crown jewel was too immense to ignore.

The US$35 billion transaction – the biggest ever in the sector – also fits in with the currently accepted reading of the financial runes: that the thriving economies of Asia will provide much of the next decade’s growth. Nevertheless Thiam has done well to secure the services of three of the financial crisis’s undoubted winners in Credit Suisse, JP Morgan Cazenove and HSBC.

The impressive line-up are only too willing to flex their financial might to back such a deal through a US$21 billion underwritten rights issue, the largest ever for acquisition purposes. If the Pru’s biggest investors, Capital, BlackRock and Legal & General, are unwilling to take up their rights, finding fresh investors should not be too difficult.

Institutions had already been sounded out about buying shares in AIA directly, via a Hong Kong float, led by Deutsche and Morgan Stanley, touted to bring in up to US$20 billion. The Pru is paying a rich price, 24 times last year’s US$1.44 billion operating profits, to take control of AIA. It seems unlikely that a rival will step in and spoil the show.

Chinese financial players would be unwilling to enter a bidding war, based on past form. In the US, MetLife is already in negotiations to buy AIG’s American Life Insurance Company for up to US$15 billion. General Re owner Warren Buffett seems spent after splashing out US$26 billion for Burlington Northern railroad.

European interlopers, such as Axa, Zurich or Allianz, can’t be ruled out though, if an estimated US$1 billion break fee doesn’t act as a deterrent. However, buying up part of the Pru’s UK business could be an alternative for them.

Thiam has denied this is an option. But the rights issue effectively doubles Pru’s equity capital, after today’s 12% fall in the share price. Add in the US$5 billion of debt taken on and divestments might be back on the agenda before long.

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