Prudential Plc Agrees to Buy AIA for $35.5 Billion (Update3)March 01, 2010, 7:19 AM EST
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By Kevin Crowley and Zachary R. Mider
March 1 (Bloomberg) -- Prudential Plc, Britain’s biggest insurer, agreed to buy an Asian life insurance unit from American International Group Inc. for $35.5 billion in cash and stock to gain more than 20 million customers in the region.
Prudential will pay $25 billion in cash and $10.5 billion in stock and other securities for AIA Group Ltd., the London- based insurer said in a statement today. The insurer said it plans to raise $20 billion in a rights offering and sell about $5 billion of bonds to finance the cash part of its offer.
The purchase is Chief Executive Officer Tidjane Thiam’s first since he took over five months ago, and is the biggest announced by any company worldwide this year, according to data compiled by Bloomberg. Prudential is trying to boost sales in Asia as growth in the U.K declines. By acquiring AIA, Thiam gets a business with more than 90 years in Asia and more than $60 billion of assets in 13 markets in the region. The price is about 50 percent greater than Prudential’s market value.
“It shows the company is very bullish on the Asia market,” said Luo Yi, a Shenzhen-based analyst at China Merchants Securities Co. “The Chinese market has vast potential.”
Prudential shares fell 13 percent to 525.5 pence as of 12 p.m. in London trading. The stock has more than doubled in the past year, giving the insurer a market value of 15.3 billion pounds before the purchase was announced. AIG advanced 9 percent to $27 in early trading at 7:01 a.m. in New York.
Faster Than IPO
The sale would be AIG’s largest since it received a U.S. government bailout in 2008. AIG had planned an initial public offering for the Hong Kong-based unit to help repay its $182.3 billion rescue. AIG will own about 11 percent of Prudential following the transaction, Thiam told reporters today.
“We decided that a sale to Prudential enables AIG to realize value on a faster track to repay U.S. taxpayer,” AIG CEO Robert Benmosche said in a statement today.
The insurer is paying about 1.69 times the embedded value of AIA in 2009. Chinese insurers are trading for about 2.9 times embedded value, and Axa Asia Pacific Holdings trades at about 1.7 times, according to Thiam. Embedded value estimates a company’s net worth excluding new business.
‘The Right Move’
The acquisition of AIA, founded in Shanghai in 1919, gives Prudential a business with 20,000 employees and 250,000 agents in markets spanning China to Australia. AIA sells life, accident and health insurance policies, and private retirement planning and wealth management services, its Web site shows. McKinsey & Co. has estimated Asia will deliver around 40 percent of global life insurance premium growth over the next five years.
“Strategically it’s probably the right move” for Prudential, said Justin Urquhart Stewart, who oversees about $3.3 billion at 7 Investment Management in London, including Prudential shares. “It puts them into a different league.”
The insurer plans to list its shares on both the Hong Kong Stock Exchange and the London Stock Exchange following the transaction. It will keep its headquarters in London.
Thiam said in a Feb. 17 interview that he wants to raise the proportion of sales from Asia to 80 percent by 2015 from 50 percent now. Prudential and AIA combined would have had about 60 percent of new business profit from Asia in 2009, he said today.
“This transaction is hugely exciting and a one-off opportunity,” Thiam said in a statement. “It puts us in a strong leadership position in all the critical growth markets in the region.”
Credit Suisse Group AG, JPMorgan Cazenove and HSBC Holdings Plc agreed to underwrite the $20 billion rights offer in full. The shares are likely to be sold for 40 percent less than today’s price, Thiam told reporters today. Prudential will pay about $1 billion in fees and other costs related to the offer.
The offering would be the biggest since Lloyds Banking Group Plc’s 13.5 billion pounds ($20.4 billion) sale in December, still the U.K.’s largest.
“If you’ve got backing from a few banks and a few major shareholders, there will be a way to make this deal happen,” said Marcus Barnard, a London-based analyst at Oriel Securities Ltd. with a “sell” rating on the stock. “The question is the cost and the risk involved.” The insurer may be forced to sell assets in India and China to comply with local foreign-ownership regulations, he said.
India, China Talks
Thiam said Prudential is in talks with regulators in India and China. The insurer intends to keep its stake in a joint venture with China’s Citic Group, he said. In India, where both Prudential and AIG have separate joint ventures, regulators have told the company it can’t have two licenses, Thiam said.
AIG said last May that it would pursue an IPO of AIA after an auction of the business failed to turn up bids that matched what AIG executives thought the company was worth. That included a bid from Prudential that valued AIA at about $15 billion, one of the people said.
The sum raised in the sale would exceed the total of more than 20 other asset sales announced by AIG, which has struck deals to raise more than $12 billion by selling units, including a U.S. auto insurer and equipment guarantor.
AIG had a fourth-quarter net loss of $8.87 billion, narrower than the insurer’s $61.7 billion loss the previous year, which was the biggest in U.S. corporate history.
AIG gave a $9 billion stake in American Life Insurance Co., known as Alico, and $16 billion in AIA, its biggest non-U.S. life insurance units, to the Fed in December. AIG will redeem the Fed’s $16 billion interest in AIA with proceeds from the sale and repay about $9 billion more on the credit line, the insurer said today.
The $10.5 billion in securities obtained from Prudential will be sold “over time, subject to market conditions, following the lapse of agreed-upon minimum holding periods,” AIG said in a statement. “All net cash proceeds from the monetization of these securities will be used to repay any outstanding debt” to the Federal Reserve Bank of New York.
AIG owed about $25 billion on the line as of last week. The insurer had drawn more than $40 billion before reducing the sum in December.
The Fed agreed last year, as part of AIG’s fourth bailout, to allow the company to pay down its debt with an equity interest in the life units before completing a sale. The plan reduced pressure on AIG to sell in early 2009 when potential bidders were hobbled by losses and the inability to raise funds.
AIG’s bailout includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury Department and $52.5 billion to buy mortgage-linked assets owned or backed by the insurer.
MetLife Inc. has said it is in talks to buy Alico, which operates in more than 50 countries outside the U.S. The insurers are discussing a price of about $15 billion, according to people with knowledge of the matter.
Citigroup Inc. and Goldman Sachs Group Inc. advised AIG. Prudential Plc has no relation to Newark, New Jersey-based Prudential Financial Inc. and operates in the U.S. through its Jackson National Life Insurance Co. unit.
--With assistance from Howard Mustoe in London, Hugh Son in New York, Cathy Chan in Hong Kong and Dingmin Zhang in Beijing. Editors: Edward Evans, Dan Kraut.
To contact the reporter on this story: Kevin Crowley in London at email@example.com; Zachary Mider in New York at firstname.lastname@example.org
To contact the editors responsible for this story: Edward Evans at email@example.com
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