London: Prudential has entered talks to cut its $35.5 billion offer for AIG’s Asian life insurance arm in a last-ditch bid to salvage a deal criticized by shareholders as too expensive.
The UK’s biggest insurer wants to cut the price to about $30 billion, a reduction of 15%, said one source close to the deal, who asked not to be named.
AIG feels $30 billion for AIA is too low and is not in a rush to do a deal, another source familiar with the matter said late on Friday.
AIG believes it has many options for AIA, as it views AIA as a “valuable property” and does not want to sacrifice value, the source said.
An AIG spokesman was not immediately available for comment.
Options such as an IPO for AIA may not be so attractive in the current volatile equity market. The insurance giant could, however, try to find other partners for a deal.
But the US Treasury Department, which bailed out American International Group Inc in 2008, said it has considered only a $35.5 billion deal to divest the insurer’s main Asian unit to Prudential, Bloomberg reported.
The clock is ticking for Prudential, which faces a shareholder vote on the deal in little over a week, meaning negotiations are likely to intensify in the coming days.
CEO futures at stake
The future of Prudential chief executive Tidjane Thiam hinges on the success of his bid for American International Assurance, (AIA) launched by the former Ivory Coast government minister in March after less than a year in the top job.
“Discussions regarding the current status of the transaction have taken place between Prudential and AIG and are continuing,” Prudential said in a statement on Friday.
“These discussions may or may not lead to a change in the terms of the combination,” it said.
A collapse of the deal would also be bad news for Robert Benmosche, the head of AIG, which is operating with $132 billion in government support and is under pressure to return the money to taxpayers.
The new price negotiations come amid fears the deal, to be funded in part by a record $21 billion rights issue, could fall short of the required 75% approval in a 7 June shareholder vote.
“The only way that the Pru is going to get a yes vote at the (meeting) is if they manage to get a price cut. In its current form, I am almost certain the vote will fail,” one Prudential shareholder told Reuters, requesting anonymity.
A $5 billion price cut “would certainly get more people on side. We would certainly revisit our view,” the investor said.
Olivetree Securities strategist James Chappell estimated that cutting the price to below $31 billion would give the deal a greater than 50% chance of going ahead, compared with about 20% now.
“Prudential will still need to rebuild relationships with investors and reassure that they can execute on the acquisition,” he said.
A large majority of 72% said Prudential was paying too much in a Reuters poll of 23 shareholders and analysts on Thursday, while half of the shareholders polled said they expected the company to lose the 7 June ballot.
On Friday, fund managers F&C asset management and Cavendish asset management both said they would vote against the deal.
A no vote would mark an almost unprecedented rejection of a major company’s M&A plans by its shareholders, and cast doubt over Thiam’s future as Prudential’s boss.
He has championed the AIA deal, the insurance sector’s biggest-ever takeover, arguing that it gives the 162-year-old British insurer a rare opportunity to grab a commanding presence in Asia, the world’s fastest-growing financial services market.
Earlier this week, voting adviser RiskMetrics told investors to vote against the deal while the influential Association of British Insurers issued its own warning, telling investors to consider their options carefully.
A glimmer of hope is that AIG, which originally planned to offload AIA in an initial public offering, may be willing to accept a lower price because weak equity markets have now made a flotation less attractive.
“While we have no feel for AIG’s position, we suspect that the IPO valuation of AIA was below $30 billion,” Panmure Gordon analyst Barrie Cornes wrote in a note.
“Given that the markets have moved south and IPOs have been pulled, we suspect that AIG may well look pragmatically on the renegotiation of the price.”
Prudential’s London-listed shares closed down 1.1% at 541.5 pence. Shares of AIG closed down 3% at $35.38 on the New York Stock Exchange.