Pru bosses hold regulator talks as clock ticks

* Prudential bosses to meet FSA chief – source

* Rights issue details still expected within days

* Top 20 shareholder says deal “dead in the water”

By Victoria Howley and Raji Menon

LONDON, May 7 (BestGrowthStock) – Prudential (PRU.L: ) bosses will
hold high-level talks with British regulators on Friday, sources
said, stepping up negotiations as time begins to run out for its
planned $35.5 billion acquisition of AIG’s Asia arm.

Insurer Prudential — forced to delay details of a $21
billion cash call on Wednesday after an embarassing last-minute
regulatory snag — will step up contacts with the regulator
before the weekend, people familiar with the matter said.

Chairman Harvey McGrath and chief executive Tidjane Thiam
were due to meet Financial Servics Authority boss Hector Sants
later on Friday, one of the sources said, hoping for a swift end
to the hiatus and an eleventh-hour rescue for the deal.

The FSA and Prudential declined to comment.

McGrath and Thiam, who has been in the job less than a year,
are widely seen as the architects of the takeover of American
International Assurance (AIA), the most audacious deal since the
credit crunch.

Both now face an uphill task to restore credibility with
investors and would struggle to retain their jobs if the deal
were to fail, analysts and investors said.

Adding to its regulatory woes, world markets continued to
tumble on Friday on worries over euro zone debt, leaving
Britain’s largest insurer to finalise its bumper rights issue
against the background of volatile markets and increasingly
mutinous shareholders — both poor ingredients for success.

“I was positive about the deal before, but a lot of that
rested on management credibility,” one top 20 investor said.

“If it was a small deal, the consequences of things going
wrong might not be fatal. But with something like Pru where you
are basically buying something the same size as you are in a
market that most investors are less familiar with — the scope
for anything going wrong is (increased) by that much more.”

Another top 20 shareholder said he was no longer confident
the deal would go through.

“The fall in the market just makes this even more difficult
and the market is not interested in writing such a large
cheque,” he said. “I think the deal is dead in the water. The
shares would be weaker if the market thought the deal would go
ahead — shares would have been somewhere around 450 pence
rather than 550 pence.”

Prudential shares were trading at 540.5 pence, down 1.6
percent at around 1315 GMT.

SUBORDINATED SOLUTION?

One of the sources said the FSA’s concerns about capital
were heightened because Asian regulators did not want Prudential
to take around 1 billion pounds ($1.47 billion) a year out of
AIA subsidiaries in the region.

Prudential wanted to use Asian cashflows to boost the
group’s insurance group directive (IGD), a pot of extra cash
British insurers hold in reserve to cover payments to customers
in times of economic hardship.

With access to the Asian cashflows uncertain, the FSA
refused to allow Prudential to use them towards its IGD, the
source said.

As an alternative, Prudential proposed swapping some of the
5 billion pounds of senior debt underwritten by Credit Suisse,
HSBC and JP Morgan into subordinated capital.

The three banks also agreed to provide another loan in case
the IGD dropped to a level that made the FSA uncomfortable, the
person said, but the FSA has still not approved the plan and
further changes could be necessary.

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

Prudential confirmed on Friday it would revise all aspects
of its rights issue timetable, including its shareholder
meeting, Hong Kong listing and secondary Singapore listing.

Stock Analysis

(Additional reporting by Clara Ferreira-Marques; Editing by Dan
Lalor)

Pru bosses hold regulator talks as clock ticks