E negotiations are Prudential’s last chance to salvage the deal, but even with a $5bn price discount on Asian insurer AIA’s $35.5bn price-tag it is likely to prove too expensive.
After all, if this game changing deal was so attractive, why aren’t any of Pru’s rival insurers who also lack Asian market share showing any interest? The answer is that the price is too high and a 15.5 per cent discount won’t change that.
James Chappell at Olivetree Securities calculates that cutting the acquisition price by even more – $8.5bn –?could potentially generate positive returns for investors by 2012. A discount possible, if AIG waives Pru’s current agreement to issue $5.5bn in new shares to AIG, along with a $3bn bond that converts into shares in the combined group. But this return is only achievable if Prudential manages to grow AIA’s earnings by 20 per cent per annum – and with execution risk this is unlikely. And while the American government, which owns 80 per cent of AIG, is determined to get the failed insurance giant off its books $8.5bn could be more than US taxpayers are willing to sacrifice, especially when Prudential cannot guarantee that its shareholders wouldn’t rebel again.
AIG might conclude that its best option is to pocket the £153m break fee and float AIA in Hong Kong when market conditions improve.