AIG is in talks with Prudential Plc to restructure a $35.5 billion deal to sell its Asian life insurance unit to the British insurer, sources familiar with the matter said on Tuesday.
The negotiations, centered on the funding behind the deal, include cutting the $25 billion cash component but would not alter the overall price, the sources said.
American International Group Inc may agree to reduce the cash component by $2 billion and instead subscribe to a Prudential loan or hybrid securities of that amount, one of the sources said.
The stakes are high. Prudential is facing an uphill struggle to restore some credibility for Chief Executive Tidjane Thiam, who agreed to pay top dollar for a company larger than the British insurer. The deal is also key to AIG's efforts to repay the U.S. government after a $182.3 billion bailout.
Prudential's audacious deal to buy American International Assurance (AIA) hit an embarrassing last-minute snag last week, when British regulators blocked the company's plans to publish details of a $21 billion cash call to finance the deal.
Prudential has also faced growing pressure from shareholders, whose concerns have increased following the delay in closing the deal. The British company needs 75 percent of investors to approve the takeover, the most audacious in the financial services sector since the financial crisis.
One of Prudential's top investors said on Tuesday he understood the company was negotiating with AIG on a lower price, which would ease investors' concerns over the 1 billion sterling so-called Armageddon fund, a loan facility that Prudential has agreed to appease solvency worries raised by British regulators.
A lower asking price also gives some scope to show that they are actually doing something, because so far ... things have not been great, the investor said. Investors are very alarmed at how poor the whole execution of the deal has been to date.
But one of the sources said the talks between AIG and Prudential are more about structure than about price.
The two sides are now working to get a deal done this week, although there was no certainty that would happen, two sources said. Prudential's talks with AIG are part of wider negotiations with British regulators, the Financial Services Authority (FSA).
Speaking at a meeting in New York on Monday, AIG Chief Executive Robert Benmosche told employees he was confident the sale would move forward, a third source familiar with the matter said.
AIG, nearly 80 percent-owned by the U.S. government, has been counting on the deal to bring it to a point where it can start looking for ways to completely repay the government after its September 2008 rescue.
A failure to close the deal would set back the insurer's repayment plans and could turn into a political and public relations disaster for both AIG and the U.S. government.
Sources told Reuters on Sunday that Prudential and the FSA found common ground in talks over the weekend but further steps were needed to salvage the takeover.
AIG and Prudential declined to comment.
AIG shares were up 6 percent at $43.43 in midday trading on the New York Stock Exchange. Prudential closed down 2.4 percent at 540.2 pence after a negative day for the sector.
(Reporting by Paritosh Bansal in New York and Clara Ferreira Marques in London; additional reporting by Victoria Howley and Raji Menon in London; editing by David Cowell and John Wallace)