The Prudential and the Financial Services Authority are close to striking an agreement over the insurance giant's planned £24bn takeover of its Asian rival AIA, after intervention by the City watchdog last week delayed a rights issue to fund the takeover.
The two groups have been ironing out the details of a plan that is acceptable to the FSA, after the regulator last Tuesday night blocked the announcement of the £14bn rights issue, scheduled for Wednesday morning. The Pru is understood to have been angered by the FSA's 11th-hour intervention, which led to speculation among analysts that the deal might be doomed.
The FSA had become worried about the combined group's capital position following the merger, which involves $5bn (£3.3bn) of debt financing as well as the equity call. The Pru will drop the debt element of the deal, after agreeing instead to raise the funds as hybrid capital. The structure of the hybrid instruments would enable the firm to maintain capital ratios at a level acceptable to the FSA. The Pru has also agreed to set up a £1bn contingency fund, described as "Armageddon money" to help deal with any unforeseen financial shocks.
Despite the broad agreement, the two parties have not yet concluded the arrangements, and it is expected that a formal announcement to the Stock Exchange could be delayed until the end of this week at the earliest. Talks between the two parties began on Friday afternoon and are understood to have continued over the weekend.
Any settlement would come as a huge relief to Prudential's chief executive, Tidjane Thiam, who is now under intense pressure to get the deal concluded. Last Friday, the takeover appeared to be in deeper trouble after the Pru backtracked on a timetable, and delayed stock market listings in Hong Kong and Singapore.
Mr Thiam and Harvey McGrath, Prudential's chairman, would certainly face calls to resign if the deal collapsed, and despite the talks with the FSA, the takeover still faces opposition from Prudential shareholders.
Robin Geffen, an investor at Neptune Investment Management, has said that he plans to gather the support of the 10 per cent of shareholders that are needed to put together a resolution calling on Mr Thiam to go. Mr Geffen said of the AIA deal: "This isn't a transformational deal. This is a disastrous deal."
The group has stressed that the details of the takeover will be revealed when the rights issue is formally launched, but that has not prevented a number of backers arguing that the proposed price is too high.
Last week, several analysts declared the takeover dead after the FSA's intervention. "We believe that the disagreement with the FSA over the risks involved in acquiring AIA may well prove to be the final straw for the proposed [Prudential and AIA] deal," said Barrie Cornes, an insurance analyst at Panmure Gordon.
The Prudential would also face break fees of as much as £150m if the deal collapses. Additionally, $100m may become due if the deal is not finalised by the end of August. Credit Suisse and JPMorgan Cazenove, along with Lazard and HSBC, are advising on the deal and are expected to share fees of as much as $600m.
A takeover of AIA, the Asian arm of the US group AIG, would make the Prudential the world's biggest insurance firm. The Pru's management has argued that it is right to buy into Asia's rapidly growing insurance market. The deal, which was first announced in February, would give Prudential 20 million new customers.Reuse content