Britian’s Pru, Regulators Close to Deal on Buy of AIG’s Asian Unit

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Britain’s Prudential has made progress in make-or-break talks with UK regulators over its acquisition of AIG’s Asian arm, and is close to announcing a deal, sources familiar with the matter said.

The insurer’s proposed $35.5 billion acquisition of American International Assurance (AIA) hit an embarassing last-minute snag last week, when the UK blocked Prudential’s plans to publish details of a $21 billion cash call to finance the deal.

Prudential and the Financial Services Authority (FSA) had found common ground in talks over the weekend, the sources said on Sunday, but further steps were needed to salvage the audacious takeover.

“We’re working towards a solution,” one source familiar with the situation said. “It has to be put back to (the FSA), it’s an ongoing process …. There’s been progress made.”

“The intention is to get the prospectus out as soon as possible,” another source familiar with the situation said. This source said further meetings would take place on Sunday.

The rights issue prospectus and further details on the deal are expected within days, but the sources made it sound unlikely they could be published as early as Monday.

Pru is facing an uphill struggle to salvage some credibility for its Chief Executive Tidjane Thiam, as it seeks the approval of cautious regulators against a background of jittery world markets and increasingly mutinous shareholders.

The group needs 75 percent of shareholders to approve the deal, but several major investors have expressed concern and their skepticism has increased following the unprecedented eleventh-hour delay.

Some investors could seek a reduction in the price of the deal in return for their support.

Prudential and the FSA declined to comment on Sunday.

CAPITAL WORRIES

The FSA’s worries have focused on capital, the insurer’s ability to withstand stress tests and the complexity of a deal that involves 22 jurisdictions.

One source close to the matter said last week the FSA’s concerns were heightened because Asian regulators did not want Pru to take around 1 billion pounds ($1.55 billion) a year out of AIA subsidiaries in the region.

Prudential wanted to use cashflows from Asia to boost the group’s capital surplus under the Insurance Group Directive (IGD), a pot of extra cash the European Union tells insurers to hold for times of economic hardship, the source said.

As an alternative, Prudential has proposed swapping some of the $5 billion of senior debt underwritten by Credit Suisse, HSBC and JP Morgan into subordinated or contingent capital, sources with direct knowledge of the deal said.

Subordinated capital counts towards the IGD, while senior bank debt does not.

The three underwriting banks have also agreed to provide another loan in case the IGD dropped to a level that made the FSA uncomfortable, one of the sources had said.

If Pru’s deal efforts fail, its management team is widely expected to face calls to resign and the company itself could become a target for investors seeking to break up the business.

The Sunday Express said U.S. fund manager Franklin Templeton and Blackstone were among the groups eyeing Pru’s fund management arm, M&G.

($1=.6465 Pound)

(Additional reporting by Clara Ferreira-Marques; Editing by Erica Billingham)