An Insurance Giant's Make-or-Break Deal

By Kevin Crowley

Investors resist a $35.5 billion bid by Britain's Prudential for a unit of AIG. A critic describes it as selling "billions of cheap stuff to buy billions of expensive stuff"

When Tidjane Thiam was strategy director at British insurer Aviva in 2006, he tried to buy Prudential, the U.K.'s biggest insurer. The bid failed. Thiam's career flourished and subsequently he moved to Prudential (which has no connection to the U.S. company of the same name) and became chief executive officer seven months ago. Now he's trying another ambitious acquisition—the purchase of American International Group's (AIG) AIA Group for $35.5 billion. If he fails this time, investors say, he may pay with his job, and the 162-year-old insurer itself could be broken up.

"Given that the CEO and the chairman [Harvey McGrath] attached their credibility and careers to this deal, it's going to be very difficult for them to survive if this fails," says Colin McLean, who helps manage $975 million at SVM Asset Management in Edinburgh. McLean sold his Prudential stock earlier this month because he doesn't support the bid.

AIA sells life, accident, and health insurance policies and private retirement planning and wealth management services in Asia, where it has more than $60 billion in assets. The purchase would make Prudential the biggest international insurer in Asia, Thiam, 47, told reporters in March. Prudential plans to fund the acquisition by raising $21 billion in a rights offering, in which existing shareholders get the chance to buy more stock. Earlier this month, the U.K.'s Financial Services Authority, the equivalent of the Securities & Exchange Commission, blocked the offering, which had been scheduled for May 28, over questions about Prudential's capital levels. Specifically, the FSA is concerned that in the event Prudential needed extra capital to deal with a financial crisis at home or in the U.S., regulators in Asia might prevent it from tapping capital reserves from its subsidiaries, according to two people with knowledge of the situation. The delay may be the "final straw" for the takeover, says Barrie Cornes, a London-based analyst at Panmure Gordon, who has a "buy" rating on the stock.

Prudential may seek to increase its capital reserve by $1.5 billion, says a person with knowledge of the matter. And it is in talks with AIG to change the terms of the deal to help win FSA approval. Yet even if Thiam gets a go-ahead from the FSA, he still needs 75 percent of investors to support the rights offering. That won't be easy. London-based Neptune Investment Management has started a Web site, www.prudentialactiongroup.com, to encourage fellow shareholders to oppose the bid.

Thiam has an unusual history for an insurance CEO. Born in the Ivory Coast, a former French colony, and schooled in Morocco, Thiam started his career working for McKinsey in France. He returned to the Ivory Coast, spending five years working for the nation's development department before the government was deposed in a military coup in December 1999. He escaped unhurt after being placed under house arrest. He returned to McKinsey before moving to Aviva, the U.K.'s second-biggest insurer, as head of group strategy and development in 2002. Six years later, Thiam joined Aviva competitor Prudential as chief financial officer.

Investors fault Thiam for failing to make a strong case for the purchase. Thiam and Finance Director Nic Nicandrou held investor meetings in London, Hong Kong, and the U.S. after announcing the takeover on Mar. 1. Thiam was unable to provide any detail on AIA's investments, capital structure, or trading beyond the Mar. 1 statement, says one investor, who declined to be named because the meeting was private. "To support a rights offering of that size you need to be confident that the assets you're buying are being acquired at a very good price," says Ivor Pether, who helps oversee $9 billion at Royal London Asset Management. "That hasn't really been demonstrated yet."

"Our investors are waiting for the prospectus, and we will be publishing it as soon as we can," says Ed Brewster, a spokesman for Prudential. Thiam would not comment for this story. The prospectus is important because it contains critical information on AIA's assets and the final terms of the deal.

"From a strategic perspective this deal makes absolute sense," says James Laing, who helps manage $256 billion at Aberdeen Asset Management, a big Prudential shareholder. "We need to see the prospectus so that we can make a sensible judgment on the valuation."

The deal is not as critical for AIG as it is for Prudential. The bailed-out insurer has said it would use at least $25 billion from the AIA sale to pay down a Federal Reserve credit line that expires in 2013. AIG originally planned an initial public offering for AIA. If the Prudential deals falls apart, says Clark Troy, a senior analyst for research firm Aite Group, AIG will be able to sell the unit "either through an IPO or another buyer coming along."

Cavendish Asset Management is among the Prudential investors that have said breaking up the company would be a better move than a major acquisition. Shareholders would receive $36 billion, about 75 percent more than the company's present market value, if the U.K., U.S., and Asian divisions were sold off separately, according to Cornes at Panmure Gordon.

James Clunie, manager of the $2.3 billion U.K. Growth Fund at Scottish Widows Investment Partnership in Edinburgh, didn't wait to see how it all plays out. He sold his fund's Prudential stock after the deal was unveiled. (Other Scottish Widows funds still hold Prudential shares.) Prudential's raising money to fund the acquisition amounts to selling "billions of cheap stuff to buy billions of expensive stuff," Clunie says. "It's a bad deal. It doesn't look sensible