Britain's Prudential
will buy AIG's Asian arm for $35.5 billion in the insurance sector's biggest deal ever, helping the bailed-out U.S. group repay a big chunk of its taxpayer debt.

Britain's No. 1 insurer said it would finance the buy through a rights issue of $21 billion including costs and fees, a record for an acquisition-related cash call, and by raising $5 billion of debt.

The acquisition increases Prudential's already strong exposure to soaring demand for personal financial services in Southeast Asia as rapid economic growth there lifts consumer spending power, compensating for at-best sluggish growth in Britain.

Transformational is an overused word, but this deal is truly transformational, Prudential Chief Executive Tidjane Thiam told reporters. The British company reported the deal on Monday, confirming an earlier Reuters report.

Buying American International Group Inc Asian arm, AIA, will lift the proportion of Prudential's new business profit generated in Asia to 60 percent from 44 percent, while roughly trebling its Asian customer base to 30 million, the company said.

Investors and analysts said they needed to know more about AIA before they can judge whether the takeover justifies the rights issue, whose proceeds will nearly equal Prudential's current market value of about $23 billion.

Fifteen billion pounds is a huge amount, and I would want to see more details of the kind of return profile and the timetable for that, one top 10 Prudential shareholder said, speaking before the deal was confirmed.

Prudential shares fell 12 percent to 530 pence against a slightly higher FTSE 100 <.FTSE>, while AIG shares were up 6 percent at $26.30.

(The deal) is going to be enormously dilutive, said ING analyst Kevin Ryan. No one knows exactly what AIA contains or how profitable it is, or how it overlaps with Pru's existing businesses.


The acquisition, after an initial approach for AIA by Prudential fell through last year because the two sides could not agree on price, marks the company's first major transaction under the charismatic Thiam, who took over the top job in October.

AIG, which received a $182.3 billion taxpayer-funded rescue two years ago, will use $16 billion of the cash portion of the sale proceeds to pay the Federal Reserve Bank of New York for its stake in a special purpose vehicle that holds AIA.

The remaining $9 billion of proceeds will be used to pay down the Fed's credit facility, which has an outstanding balance of about $25 billion.

Under the deal, AIG will also receive $10.5 billion in Prudential shares, giving it a stake of about 11 percent, which it plans to sell to further reduce its borrowings.

AIG had been planning to float AIA on the Hong Kong stock exchange as an alternative to a disposal.

In considering two viable, very attractive alternatives to successfully monetize AIA, including an initial public offering, we decided that a sale to Prudential enables AIG to realize value on a faster track to repay U.S. taxpayers, AIG Chief Executive Robert Benmosche said in a statement.

The Prudential cash call is underwritten by Credit Suisse, HSBC and JP Morgan Cazenove, who are also acting as bookrunners.

The rights issue is expected to be completed in June, and it is a reasonable assumption that the new shares will be offered at a discount of about 40 percent, Thiam said.

He said AIA's price tag is equivalent to 1.69 times its embedded value, an insurance sector valuation measure which includes the present value of future profits. He said this compared with a typical multiple of 1.7 to 1.8 for Asian insurers outside China.

Prudential's own shares currently value it at around one times embedded value, but its Asian business alone is closer to 1.7 times, Thiam said.

He also said Prudential plans to keep its British division for the foreseeable future, dispelling speculation the business might be sold so the group can concentrate on Asia.

Prudential on Monday also said its 2009 operating profit rose 8 percent to 3 billion pounds.

(Reporting by Myles Neligan; Additional reporting by Raji Menon and Clara Ferreira-Marques in London and Paritosh Bansal in New York; editing by John Wallace)