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Prudential Plc Agrees to Buy AIA for $35.5 Billion

Prudential Plc, Britain’s biggest insurer, agreed buy American International Group Inc.’s Asian operations for $35.5 billion in cash and stock to gain more than 20 million customers in the region.

 
By Kevin Crowley and Zachary R. Mider (Bloomberg) -- Prudential Plc, Britain’s biggest insurer, agreed buy American International Group Inc.’s Asian operations 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. Prudential Chief Executive Officer Tidjane Thiam is trying to boost the insurer’s 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 purchase price is about 50 percent more than Prudential’s market value. “If you look at the price, 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 11 percent to 537.5 pence as of 10:49 a.m. in London trading. The insurer said it will seek to list its shares on the Hong Kong Stock Exchange following the transaction. 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. Faster Than IPO “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. Prudential’s offer may tempt rivals to bid for AIA, especially if AIG were prepared to lower its asking price, said Eamonn Flanagan, a Liverpool-based analyst at Shore Capital Group Plc who has a “buy” rating on Prudential stock. The insurer is paying about 1.69 times the embedded value of AIA in 2009. Embedded value estimates a company’s net worth excluding new business. 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. ‘The Right Move’ “Strategically it’s probably the right move” for Prudential, said Justin Urquhart Stewart, who oversees about $3.3 billion as director of 7 Investment Management in London, including Prudential shares. “It puts them into a different league.” 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.” Prudential has a market value of 15.3 billion pounds. The stock has more than doubled in the past year. Credit Suisse Group AG, JPMorgan Cazenove and HSBC Holdings Plc agreed to underwrite in full the $20 billion rights offer. That would be about equal to Lloyds Banking Group Plc’s 13.5 billion pounds ($20.4 billion) sale in December, still the U.K.’s biggest. ‘Risk Involved’ “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. 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. Biggest U.S. Loss AIG had a fourth-quarter net loss of $8.87 billion, narrowing from $61.7 billion a year earlier when the insurer recorded the biggest loss in U.S. corporate history, the company said Feb. 26. The insurer gave stakes in American Life Insurance Co., known as Alico, and AIA, its biggest non-U.S. life insurance units, to the Fed in December. MetLife Inc. has said it is in talks to buy Alico, which operates in more than 50 countries outside the U.S. 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.

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