American International Group (AIG) rejected Prudential PLC’s (PUK) offer price of $30.375 billion to buy AIG’s Asian life-insurance unit, AIA Group, on June 1, 2010. AIG considers AIA to be a valuable property and is not ready to settle for a lower value, as it believes AIA has other options.
AIG, which is presently operating with $132 billion in government support, will be adversely impacted in the short run if the deal collapses, as it was selling AIA to partly pay back the bailout money to the Federal Reserve, which rescued AIG from collapsing in 2008.
At least 75% of Prudential shareholders’ approval was required to proceed with the deal at the value set by AIG. However, the shareholders of Prudential considered the deal to be too expensive. As a result, it intended to slash the original deal value of $35.5 billion by about 15% to $30.0 billion. Prudential’s new deal comprised $23 billion cash, 2.16 billion newly issued shares and $2 billion in aggregate principal amount of perpetual tier one notes to be issued by the company. However, AIG considers $30 billion to be too low for AIA.
Prudential’s leading shareholder Capital Group, having a 13% stake, was expected to vote in favor of the deal if the price dropped between $31 billion and $32 billion.
As per the original deal, announced in early March this year, AIG agreed to sell AIA Group to Prudential. This included approximately $25 billion in cash, $8.5 billion in face value of equity and equity-linked securities and $2.0 billion in face value of preferred stock of Prudential Plc. The company also sold its American Life Insurance Co. division to MetLife Inc. (MET) for $15.5 billion in March 2010.
Prudential had announced a rights issue to raise $20.9 billion and debt financing to raise another $5.4 billion to fund the AIA deal.
AIG has been working for the past several quarters to sell its unnecessary businesses in an effort to repay the bailout money. However, it seems that the recent AIA deal may not develop as expected. We do not see this as a significant negative for AIG as it is expected that the company will soon find a buyer for this valuable unit.
Read the full analyst report on “AIG”
Read the full analyst report on “PUK”
Read the full analyst report on “MET”
Zacks Investment Research
