PRUDENTIAL signed a gargantuan deal to buy the Asian assets of American International Group for $35.5bn (£24bn) yesterday, a move that will see it hold a heavily discounted rights issue in May.

Chief executive Tidjane Thiam described the merger with American International Assurance as “transformational” as he announced the British insurer had the approval of AIG’s board and the US government, which owns 80 per cent of the firm.

The fused group will have more than 30m customers and 700,000 agents across 15 Far Eastern countries. It will be the dominant insurance player from Vietnam to Singapore and a force to be reckoned with globally.

Thiam said Prudential had the backing of its major shareholders to raise $20bn (£13.3bn) through a record rights issue. The rights issue will be at a 40 per cent discount and is fully underwritten by HSBC, Credit Suisse and JPMorgan, who are advising the company along with Lazard.

A significant number of Asian investors, including sovereign wealth funds, are expected to be interested in the paper.

Shares in Prudential plummeted 12 per cent after starting the day suspended as the market priced in the impending dilution. The drop came even though Thiam rushed forward the group’s full-year results for 2009, which revealed a forecast-busting pre-tax profit of £1.7bn.

Thiam will now fly to Hong Kong with AIG chief executive Robert Benmosche to kick off a whirlwind tour of the country, reassuring key AIA staff over the deal.

He told a conference call the merger would produce annual cost savings of $340m over three years.

However, he added: “This story is not about costs. We are making this transaction because we think there’s extraordinary growth available in Asia. So it’s primarily about bringing together two great brands in the most attractive region in the world.”

The takeover will lift the proportion of Prudential’s new business profit derived from Asia from 44 per cent to 60 per cent. Panmure Gordon and Fitch Ratings warned the group was overstretching itself, but Shore Capital said: “This is a slam-dunk.”