Prudential's takeover of AIG Asian arm on brink of collapse

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UK insurance giant Prudential's £25 billion bet on Asian expansion was on the brink of a humiliating collapse today.

The latest setback for the Pru came after US insurer AIG refused to lower the price it is prepared to accept for its Asian arm AIA.

The UK's largest insurer had asked AIG to revise the terms after it became clear that its shareholders would not support the acquisition of AIA at the current price of 35.5 billion US dollars (£24.5 billion).

It proposed a cut in the value of the deal to 30.4 billion US dollars (£20.9 billion) but this was rejected by AIG, which is 80% owned by the US Treasury.

The Pru said today it was considering its position but analysts believe the deal is dead after AIG made it clear that it would not consider any further revisions to the original terms.

Pru shares rose 4% as investors expressed relief that the potentially costly takeover had been avoided. The deal would have given Pru around 30 million customers in Asia and see the Asian operation become by far the group's biggest division - contributing around 60% of new business profit.

The failure of the deal extends the UK's dismal reputation for overseas takeovers. Other ill-fated deals have included Royal Bank of Scotland's acquisition of ABN Amro, HSBC's purchase of sub-prime lender Household in the United States and Marks & Spencer's deal for Brooks Brothers, which the retailer sold in 2001 for a third of the takeover price.

The Prudential's current proposal needs the support of 75% of its shareholders for the deal to go through.

The vote is due to take place on Monday but Panmure Gordon analyst Barrie Cornes said he expected the Pru to walk away from the takeover.

He added: "Pru says that it is now considering its position but, unless AIG have a change of mind, we believe that the deal will collapse as Pru will be unable to garner sufficient support to proceed with the acquisition."

The failure of the Pru to secure AIA will raise questions over the future of Tidjane Thiam, who became chief executive in October but has suffered a series of setbacks since unveiling the business-changing proposal in March.

The Pru was forced to delay a £14 billion investor cash-call being used to finance the takeover after the Financial Services Authority raised concerns about the capital strength of the enlarged company.

The rights issue was eventually launched in mid-May, but the hiccup with the FSA compounded worries over the acquisition.

As well as the price tag, investors have criticised the length of time it will take to secure acceptable returns from the investment in Asia.

Capital Group, Prudential's biggest shareholder with a 13% stake, had been expected to back the deal if the price dropped to below 32 billion US dollars.

And Neptune Investment Management said the enlarged company still lacked the strength to compete with local giants like China Life and Ping-An.

The Pru's failure to complete the deal will result in a break-fee of £153 million being paid to AIG. However, this expense will be offset by the removal of costs associated with the company's planned rights issue.

It is likely that AIG will look to float its Asian business on stock markets in the Far East.

Robin Geffen of Neptune Investment Management - who has led an investor revolt against the Pru acquisition - said it appeared "common sense had prevailed".

"From the beginning it has been an absurdly ambitious attempt by the Pru to buy a large Asian company, at a very high price, with a very unclear strategy," he said.

He added: "There are some lessons to be learnt, namely for company management to speak with their shareholders early on in shaping any deal, listen to what they have to say and be prepared to face a united force if the deal is deemed contrary to investor interests."