DEALTALK-UK Pru at mercy of volatile stock market

(For more Reuters Dealtalks, click on [DEALTALK/])

* Pru prepares to approach shareholders in volatile market

* Rights issue underwritten by over 30 banks

* Previous American General deal sunk by the market

By Victoria Howley and Clara Ferreira-Marques

LONDON, May 13 (BestGrowthStock) – UK’s Prudential (PRU.L: ), moving
ahead with its $35.5 billion bid for AIG’s (AIG.N: ) Asian unit,
will be hoping that history does not repeat itself as it looks
to push through a bumper rights issue.

The last time the insurer attempted a similarly daring
takeover — its failed 2001 attempt to buy insurer American
General — the stock market sank the all-share offer and allowed
a then-healthier AIG (AIG.N: ) to trump Prudential.

This time, the bid is largely in cash and its strategic
logic appeals to appetite for Asian exposure.

UK regulators have agreed in principle to the purchase,
according to sources familiar with the situation, Reuters
reported earlier on Thursday, and the group hopes to price its
$21 billion rights issue within days. [ID:N12232022]

Led by its newly appointed Chief Executive Tidjane Thiam,
Prudential has aggravated shareholders by delaying its
prospectus, and is now asking them to dip into their pockets at
a time of volatility not seen since the crisis.

“Prudential has eaten into the good will and tested the
patience of even its supporters, although shareholders still
don’t have anything concrete on which to judge the deal until
the prospectus comes out,” said Eamonn Flanagan, an analyst at
brokerage Shore Capital.

The VDAX-NEW volatility index (.V1XI: ), a measure of investor
risk appetite — or aversion — hit a more than 12-month high
earlier this month. It has since retreated, but remains 30
percent higher than in March.

Shares in Britain’s largest insurer, which have
underperformed the European sector so far this year, are now
trading 7 percent below their closing value on February 26 —
the last trading day before the deal was first announced.

The fully underwritten rights issue is the largest ever in
the sector and one of the bulkiest to date, particularly when
compared with Prudential’s $23 billion pre-deal market value.

But more question marks hang over it than some others. The
UK’s most recent bumper call — Lloyds’ (LLOY.L: ) 13.5 billion
pound cash call last year — was virtually secure after the
government agreed to stump up its share.

CASH CALLS

Prudential, already bruised by an embarrassing eleventh-hour
delay to its offer last week, faces an uphill battle to salvage
credibility for its management and convince a requisite 75
percent of voting shareholders to back its plans.

“Investors are very alarmed at how poor the whole execution
of the deal has been to date,” a top 20 investor told Reuters.

Pru will offer a deep discount, in line with other, similar
cash calls across the financial sector since the crisis.

Sources familiar with the matter have said the discount
would be around 40 percent to the Theoretical Ex-Rights Price,
with shareholders being offered four shares for each held.

HSBC’s 12.9 billion pound rights issue was sold successfully
in April last year at a similar discount. Some 96.6 per cent of
the shares were taken in the offer and bankers said that the
leftover stock, or rump, was sold quickly shortly after.

Prudential’s rights issue is fully underwritten by a
syndicate of over 30 banks led by Credit Suisse, HSBC and JP
Morgan Cazenove, who will share a bumper 3.5 percent
underwriting fee — some $735 million.

The last-minute snag last week to Prudential’s planned offer
for American International Assurance (AIA) has delayed the
publication of its rights issue prospectus and key details
including the price. That is now expected within days.

Regulators blocked the deal on concerns over Prudential’s
capital base, but days of haggling and late-night negotiations
between the insurer, its regulators and its advisors have
finally secured a nod in principle from the UK’s Financial
Services Authority. [ID:nN12232022]

Prudential declined to comment.

Investment Analysis

(Additional reporting by Raji Menon; Editing by David Cowell)

DEALTALK-UK Pru at mercy of volatile stock market