Prudential starts record offering to fund takeover

Prudential Plc, the UK’s biggest insurer, started a $21-billion rights offering to fund its purchase of American International Group’s main Asian unit, after a 12-day delay fueled speculation the deal would falter.

Prudential will sell investors 11 new shares for every two they already own at 104 pence each, 81 per cent less than the closing price on May 14, the London-based company said in a statement today. The stock slipped as much as 5.1 per cent and was trading at 538 pence as of 10:50 am local time.

The UK insurer was this month forced to delay the publication of its offering prospectus after the Financial Services Authority raised concern that the company wouldn’t have sufficient capital following the takeover. Chief Executive Officer Tidjane Thiam, who needs 75 percent of investors to approve the rights offer at a shareholder vote, won the FSA’s backing for the deal by doubling Prudential’s capital surplus.

“There is certainly more information, much more detailed targets and how Prudential plans to achieve them in today’s offer, but it’s too early to predict an outcome yet,” said Marcus Barnard, a London-based analyst at Oriel Securities with a “sell” rating on the stock. “The targets look ambitious. Prudential still has a lot of work to persuade investors of the merits of the acquisition,” he said.

Investor Opposition
Shareholders, including Neptune Investment Management, which owns 0.2 percent of Prudential, have criticized the insurer for not providing investors with enough information. Thiam, a 47-year-old Ivory Coast-born Frenchman, is also facing opposition from some stockholders concerned about the price of the takeover, the biggest deal in Prudential’s history.

Including fees to underwriters, the rights offering will surpass the 13.5 billion-pound share sale by Lloyds Banking Group Plc in November. Credit Suisse AG, HSBC Holdings Plc and JPMorgan Cazenove Holdings are managing the deal, which is fully underwritten by 33 banks and sovereign funds including Qatar Holdings LLC.

The value of AIA may increase 80 per cent from the acquisition price by 2013, Thiam said today. Cost-cutting and the benefits of an increase in market share will probably boost the value of AIA to about $60 billion in the next three years, he said.

Prudential will set up a 1 billion-pound ($1.44 billion) subordinated-debt facility to boost its reserves, the insurer said, confirming it has reached an agreement with the FSA on its new capital position.

The company also revised the transaction to include $5.4 billion of hybrid capital, which combines elements of debt and equity. It previously planned to sell $5 billion of senior debt.