Prudential faces a battle to seal $35.5bn Asian takeover deal

Life insurer finally fires starting gun on £14.5bn rights issue but investors are still unconvinced
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Prudential yesterday launched a fightback against a mounting chorus of criticism against its $35.5bn (£24bn) attempt to takeover Asian insurer AIA. With shareholders already warning that chief executive Tidjane Thiam is unlikely to survive the deal's collapse, Pru said investors would be offered 11 new shares for every two they hold, at an issue price of 104p to help fund what the company has called a "unique opportunity".

That represents a far deeper discount than had been expected – the new shares will be issued at an 80.8 per cent cut compared to the insurer's 542.5p closing price last Friday. However, the company sought to placate its critics by raising its cost cutting forecast to $370m a year from $340m with more than a third coming from cutting staff.

Prudential has also increased its forecast of revenue synergies by $100m to $800m, and has assumed that pre-tax new-business profit will double at the combined Asian business by 2013, matching the performance of Prudential's Asian operations over the past four years.

But to satisfy the Financial Services Authority the company has been forced to raise more pricey "junior debt" and will also have to hold a £5.2bn surplus capital pool after it has completed the deal.

Chairman Harvey McGrath said: "There has been a bit of a phoney war because of the information vacuum. Today we have published the information our shareholders have been waiting for." Tidjane Thiam, chief executive, said: "We have the team, the skills and the discipline to successfully integrate these businesses and achieve the targets we have announced today.

But critics were quick to reiterate their unhappiness with the plans, which they regard as too expensive and poorly explained.

Paul Mumford, senior fund manager with Cavendish Asset Management, said: "No one is shocked by the size of the deal, which is broadly in line with expectations, although shareholders are no doubt still trying to get their heads around the ambition and audacity of the proposed acquisition.

"The question on everyone's lips is whether or not this move is in the best interests of shareholders, with the proposal looking rather dubious at best."

David Cumming, head of UK equities at Standard Life Investments, said: "I think they will have quite a lot of trouble raising that cash, to be honest, I think they do supposedly have backers in Asia, particularly the government of Singapore, but I think it's still going to be a very difficult deal to execute. I mean we, and other shareholders, believe the price is too high and the financial case for the deal hasn't been well articulated, so I think they are going to have a difficult task getting this deal through."

Neptune Investment Management is already gathering support among smaller investors for a confidence motion to be tabled against Mr Thiam at the forthcoming EGM.

Prudential now has until 7 June to convince investors to back its plans. It needs the support of a "super majority" of 75 per cent to go through and the investment community believes the vote remains on a "knife edge". Much will now depend on the company's ability to sell the deal on a forthcoming roadshow and overcome investors' criticisms that the the company has not consulted widely enough and has failed to explain the benefits of the deal sufficiently well.

Prudential will become the biggest foreign insurer in Asia if the deal goes through, and many believe the company will ultimately sell its unloved UK business. A deal could even see Prudential moving its headquarters to the part of the world that will be the centre of its operations. Backing has come from the Governments of Qatar and Singapore and Pru will take secondary listings on the Hong Kong and Singapore Stock Exchanges.

Yesterday the share price finished down at 8p at 534.25p. However, Prudential was boosted by a strong first quarter trading update which saw sales growing by 26 per cent.

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