UPDATE 1-UK’s Pru holds 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”
(Adds details on debt, shares, quotes, background)

By Victoria Howley and Raji Menon

LONDON, May 7 (BestGrowthStock) – Prudential Plc (PRU.L: ) bosses were
holding 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.

Britain’s largest insurer — forced to delay details of a
$21 billion cash call this week after an embarrassing
last-minute regulatory snag — faces a tough weekend of
negotiations, sources familiar with the matter said.

“We’re living in the post-credit crunch world where
regulators want to show they’re in charge and bankers do what
they’re told,” a source with direct knowledge of the
negotiations said. “Deals are run by the regulators these days
and not by anybody else.”

It is unclear whether Prudential will be able to secure
agreement in time to publish its prospectus within the first
days of next week to get the deal back on track.

Chairman Harvey McGrath and Chief Executive Tidjane Thiam
were due to meet Financial Services Authority boss Hector Sants
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.
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McGrath and Thiam, who has been in the top job less than a
year, are widely seen as the architects of the takeover of
American International Assurance (AIA), one of the most
audacious deals since the credit crunch. Both now face an uphill
task to restore credibility with investors.

Adding to its regulatory woes, world markets continued to
tumble on Friday on worries over euro zone debt, leaving the Pru
to finalise and price 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.”

Prudential shares were trading at 537.5 pence, down 2.1
percent at around 1500 GMT.

According to Data Explorers, a company that tracks short
selling, the number of Pru shares held short increased 150
percent in the week ahead of May 3, to around 7 percent of the
insurer’s market capitalisation, spiking to 8 percent on May 5,
the day the delay was announced.


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 of the sources said the FSA’s concerns were heightened
because Asian regulators did not want Pru to take around 1
billion pounds a year out of AIA subsidiaries in the region.

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

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

As an alternative, Prudential has proposed swapping some of
the 5 billion pounds 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 sources said that the exact composition of the
additional capital needed was unclear, but underlined the
potential popularity of subordinated debt issued by insurers.

AXA (AXAF.PA: ), the French insurer, sold a 1.3 billion euro
subordinated bond last month and had an order book of more than
8 billion euros.

The three underwriting 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.

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 Market Analysis

(Additional reporting by Douwe Miedema, Clara Ferreira-Marques,
Alex Chambers and Steve Slater; Editing by Dan Lalor and David
($1 = 0.6802 pound)

UPDATE 1-UK’s Pru holds regulator talks as clock ticks