Sources from Wall Street Journal have reported that Prudential Financial Inc. (PRU) has resumed talks for the purchase of two of the Japanese life operations of American International Group Inc. (AIG).
The deal value is expected to lie between $4 billion and $5 billion, based on 7x−8x combined earnings of $600 million, after-tax, generated by the units.
Talks between Prudential and AIG over the sale of its operations — AIG Star Life Insurance Co. and AIG Edison Life Insurance Co. — had started last year but broke off after the latter’s chief executive commented that they would retain the companies and would operate and expand them.
Potential Impact on Prudential
Japan is the largest business base of Prudential outside the U.S., contributing approximately 40% to its revenues. The company has been operating in the country for over a couple of decades and has made three acquisitions — Orico Life Insurance and Kyoei Life Insurance Co., Ltd. in 2001 and Yamato Life Insurance Co in 2009. Japan, which has a high rate of both longevity and savings, is an attractive region for retirement products.
The purchase of AIG’s Japanese units will consolidate the already strong footprint of Prudential in the country, providing it a significant competitive advantage in the Asian region. Moreover, with excess capital of $2.5 billion on hand, the company is uniquely poised for organic business growth and acquisition opportunities.
Also, management commented during the second quarter conference call that it expects to utilize surplus cash on long-term investments as market opportunities arise. We also expect an equity issue of 1.5-2.0 billion from Prudential which will be required to finance the rest of the transaction.
However, if the acquisition takes place, we expect Prudential to scale back its share buyback activity.
Potential Impact on AIG
The proceeds generated from the sale of its twin life insurance business in Japan will help AIG repay a part of the more than $90 billion of government bailout money still left. Since September 2008, AIG has marketed its assets to pay off government loans of $182.5 billion it had received as a lifeline.
Back in March 2010, AIG sold its American Life Insurance Co. (ALICO) to MetLife (MET) for $15.5 billion. Also during March 2010, AIG completed the $500 million sale of a portion of its asset management business, branded PineBridge Investments, to the Asia-based Pacific Century Group.
AIG and Prudential are yet to come out in the open about the deal, and any last minute differences may once again hamper the transaction.
Prudential has been in the insurance and financial services business since 1848. The company operates throughout the U.K., U.S. and Asia, offering international health insurance and retirement planning services, supported by 27,000 employees worldwide.
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