Prudential faces shareholder unrest over £14bn takeover of US assurer

Prudential, the UK's second largest insurance company, was facing a revolt by major shareholders yesterday after unveiling a shock $21bn (£14.2bn) takeover of American General, a US counterpart, in what would be the largest ever transatlantic financial services deal.

Prudential, the UK's second largest insurance company, was facing a revolt by major shareholders yesterday after unveiling a shock $21bn (£14.2bn) takeover of American General, a US counterpart, in what would be the largest ever transatlantic financial services deal.

Shares in Prudential fell 14 per cent as investors questioned its all-share offer for Houston-based American General, the number three annuities business in the US. The share price fall cut the premium being offered by Prudential for the US company from 26 per cent to 11 per cent. Shares in Prudential, whose shareholders would own 50.5 per cent of the merged group, closed at 772p, valuing it at £13.7bn.

Some of Prudential's institutional investors were said to be considering blocking the merger amid concern over the generosity of the offer given the uncertainty surrounding the US economy. US funds were said to be considering opposing the deal, however, on the basis that the Prudential's offer was too mean.

The deal, which would turn Prudential into the UK's biggest insurer, contains "poison pills" to deter rival bidders and discourage either set of shareholders from blocking it. American General will have to pay the Prudential £408m if it pulls out, while it would cost the Prudential £236m to walk away.

Jonathan Bloomer, Prudential's chief executive who retains his position in the merged group, said there was no success fee for completing the deal. "As a major institutional shareholder ourselves, we certainly wouldn't be awarding ourselves that kind of thing," he said.

Chris Hitchings, an analyst at Commerzbank Securities, said: "The extraordinary thing is that one or two shareholders want to vote this down because Prudential is paying too much, while there's a groundswell of feeling in New York that they are selling American General too cheaply. It's the first time European investors have thought they are paying too much for a life insurance company, and US investors thought they are paying too little."

The combined group had £229bn of pro-forma funds under management in 2000, making it the world's sixth largest insurance company and the biggest annuities provider in the US. Mr Bloomer said the deal enabled the companies to grow their combined market share in the US while providing the financial strength to expand elsewhere. Prudential already has a North American presence through its tiny Jackson National Life Insurance unit, and is keen to tap demand for annuities from the country's maturing "babyboomer" generation.

He defended the premium being offered, saying it reflected the fundamental value of American General "The US markets seem to value insurance businesses differently, but there's no other company in the US offering the same scale."

He also said that European funds would pick up any "flowback" of stock arising from US institutions' reluctance to hold shares in a company whose primary listing is to be in London,

But City analysts remained sceptical. Roger Doig at JP Morgan, said: "Prudential has paid about 30 times the value of American General's new business. They should have paid 18 times. This really does change the balance of the Prudential in a big way and dilutes its Asian business. [Prudential] becomes a replica of the big European insurance stocks with large US exposure like Aegon and Axa."

But there were some supportive voices. "The assumption is that this deal dilutes Prudential's business in Asia. But it does the opposite, giving them the strength to develop it," said Commerzbank's Chris Hitchings. Both Prudential and American General dismissed suggestions that the marriage might encounter US regulatory problems given Prudential's ownership of Jackson Life. Clearance must be sought from each US state separately, giving the deal an expected completion date of the third quarter of 2001.

The deal was hatched in a series of informal telephone calls between Mr Bloomer and Bob Devlin, American General's chairman and chief executive, that began in November last year. Mr Devlin is to become deputy chairman of the new company, with responsibility for US operations. Two other American General board members are to become Prudential executives, with a further three becoming non-executives.

The Prudential said the influx of US executives onto the board would not lead to larger US-style salaries for Prudential executives working from the UK, Mr Bloomer included. "We pay the appropriate rate in the country in which we operate. It's not a shock to us that people in the US are going to be paid more. Jonathan will be paid the rate for the job," said Sir Roger Hurn, the ongoing chairman. The company's remuneration committee has yet to make any decisions on salary. Mr Bloomer received a basic salary of £660,000 last year, while Mr Devlin's basic salary was $1m (£667,000).

The deal is expected to generate $130m (£87m) of annual savings by 2002, at a cost of "less than one year's savings", the companies said.