The UK’s largest insurer has agreed to pay $25bn in cash and $10.5bn in equity.
Prudential in turn will seek to tap shareholders for around $20bn and issue $5 bn of senior debt to help fund the transaction.
This would potentially make it the UK’s largest ever rights issue, surpassing the record £13.5bn raised by Lloyds Banking Group last year.
The deal would mean that 60 per cent of the combined group’s new business profit would come from Asia, making it the most powerful insurance player in the high-growth Far East.
American International Assurance (AIA) boasts 20m customers across 15 Asian markets.
Tidjane Thiam, chief executive of Prudential, said: “This transaction is hugely exciting and a one-off opportunity to transform the Group. We believe that the combination of Prudential and AIA will create a unique life insurance business with a common set of customer-focused values and heritage.”
Prudential, which currently gets 44% of its sales from Asia, has made little secret of its desire to boost this further.
It believes the combination of its Asian operations with AIA will give it leading positions in seven countries with highly complementary products and distribution channels across the region.
Thiam flew out to Washington at the weekend to win over the US giant's three government trustees, who oversee Washington's 80 per cent stake in the beleaguered insurer after a series of bail-outs totalling $182bn during the financial crisis.
If all goes according to plan, Prudential will be delisted and the combined group, which will be called Prudential, will be listed and admitted to trading on the London Stock Exchange in the third quarter of 2010.
It will continue to be headquartered in London and listed on the main market of the London Stock Exchange. However, Thiam says the insurer will seek a dual primary-listing on the Hong Kong Stock Exchange in due course.
AIG had been gearing up for a March flotation of AIA on the Hong Kong Stock Exchange. This would have raised around £13bn to help repay some of the $80bn still owed to the US government.
However, this was put on hold as talks with Prudential became more advanced.
AIG is also believed to be close to completing a $15bndeal with MetLife to offload Alico, whose operations are focused in Japan and Europe. However, this has been delayed by an unresolved tax issue and could yet be blocked by the US Internal Revenue Service.
Speculation had also suggested that Clive Cowdery's Resolution (RSL) buyout vehicle had approached Thiam about a purchase of Prendential’s UK life insurance operations. However, Resolution today denied it is in discussions over any such acquisition.