Prudential's big deal in tatters as AIG refuses to cut $35bn price

Insurer's shares bounce 6 per cent on expectation AIA takeover will be dropped

Prudential's audacious attempt to become Asia's biggest foreign insurer lay in tatters last night after AIG refused to cut the agreed $35.5bn (£24.15bn) price for its Asian operation, AIA.

During an intense weekend of talks Pru demanded that the company accept a cash and share offer of $30.375bn, citing the recent sharp falls in world markets and economic turbulence. Prudential had been under massive pressure from its shareholders who have vocally argued that the insurer was over paying for AIA and knew it was all but certain to lose a vote at the original price.

But the insurer AIG, which is owned by the US Government, said in statement: "After careful consideration, the company will adhere to the original terms of its previously announced agreement with Prudential plc for Prudential to acquire AIG's wholly owned pan-Asian life insurance subsidiary AIA Group Limited. The company will not consider revisions to those terms."

Prudential was told at the end of last week by key fund managers at its leading shareholder in the US, Capital Investments, that it needed to secure a reduction of at least 10 per cent.

But UK shareholders have privately told the company that they would need more than that to back the deal. The company is understood to have considered suggesting $32bn to AIA, but ultimately rejected that price as failing to properly reflect the deterioration in investment markets in the weeks since the deal was first announced.

Yesterday Prudential said it was "considering its position" and would make a further announcement "as and when is appropriate" in the wake of the AIG announcement. However, executives are understood to have privately accepted that there is all but no chance of the deal going through. Confirmation could come as soon as today.

Shares in Prudential immediately rose in response to the news as investors welcomed the likely end of the deal. They finished the day at 575.5p, up 34p. At least one hedge fund which has been short selling the company's stock since the deal was announced declared a reduction in its position. Meditor Capital Management cut its short stance from 0.44 per cent to 0.26 per cent of Prudential.

Robin Geffen, head of Neptune, the fund manager leading the efforts of opponents to the deal still urged shareholders to register votes against until its demise is formally confirmed. But he described the likely failure as "historic". "It is the first time a rights issue of this size has been rejected, and this is very important for the City. It appears that common sense has prevailed," he said.

Analysts, too, welcomed the collapse of the deal. Barrie Cornes, at Panmure Gordon, wrote: "We think that AIG's response is a surprise given the market movement since the deal was announced and the obvious opposition to the excessive price being paid by Pru's shareholders.

"We believe that the Pru share price will bounce on the news although perhaps not up to the 603p (per) share level that the shares were at pre the AIA deal announcement on 1 March." Fund manager F&C, which said it would vote against the deal at its original price tag, offered some solace to the Prudential saying there was "nothing wrong" with the company and that it remained a supporter. Its objection to the AIA deal was based only on the price Prudential was originally planning to pay.

Prudential had lined up the biggest rights issue seen on the London market to finance the deal, with a syndicate of more than 30 banks brought on board to underwrite the £14.5bn cash call. They will face a significant cut in fees as a result of yesterday's developments. They were led by Credit Suisse, JP Morgan and HSBC, which will all likely suffer a hit to their reputations.

Prudential's efforts to take over AIA have been dogged by a series of mishaps. Mr Thiam's decision to take a job on the board of French bank SocGen outraged shareholders, who forced him to back down.

The company was also forced into an embarrassing about-turn when it scheduled a series of investor and media briefings ahead of the planned publication of a prospectus and price for the rights issue only to have to cancel them because it had not secured the approval of the Financial Services Authority for the capital structure of the enlarged group.

Sources close to the company insisted it was in "good health" and had unveiled record first quarter results with its recent trading update.

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