Britain's Prudential Plc

may quit some countries in Asia should it seal a $35.5 billion buy of American International Group's AIA, sources directly involved with the deal said on Friday, allowing the bulked-up insurer to focus on key markets.

Australia, New Zealand, South Korea and Taiwan are four markets Prudential may decide to leave due to low market share, the sources said. One source said asset sales could potentially top $1 billion.

The sources all declined to be named as they are not authorized to comment publicly on the deal.

Prudential's planned acquisition of Hong Kong-based American International Assurance, AIG's Asia life insurance group, still has some way to go before it closes.

This transaction has only just been announced and it is wrong to make assumptions on what the company may or may not do. Claims of possible divestments are entirely speculative, said external company spokesman, Tim Payne, in an emailed statement.

The deal is a transformative one, the largest-ever in the insurance industry, and one that that will immediately change Asia's insurance industry landscape.

You can bet that a lot of strategic players and financial buyers are already positioning themselves for the coming activity, one of the sources said, referring to the potential divestments that could come from the combination.

On Friday, Prudential said Singapore sovereign wealth fund GIC and Qatar Holding LLC had committed to underwriting a significant portion of its planned $20 billion rights issue that will help fund the AIA deal.

Prudential shares were up 1.3 percent in London by 1015 GMT.

Prudential is buying AIA as it bets on soaring demand in Asia for personal financial services. The move also allows it to swallow a top competitor that had planned to spin-off on its own from AIG through a $10-$20 billion Hong Kong IPO.

EXIT POTENTIAL

In South Korea, Prudential-AIA would rank No.5 in terms of market share, while in Australia, it would have just 0.5 percent market share, ranked 14th, according to a person working on the transaction. In New Zealand, they would rank sixth.

In Australia and New Zealand, AIA was focusing on independent financial adviser business, which is not the traditional agency based business that Prudential focuses on, said Sally Yim, vice president at Moody's in Hong Kong and senior analyst who covers Asia-Pacific's insurance industry.

A Hong Kong based spokesman for Prudential declined comment. An AIA spokeswoman did not return a message seeking comment.

Prudential has a joint venture in India with ICICI , a partnership that is much bigger than AIG's link-up with India's Tata Group. Tata is expected to buy out AIG's 26 percent stake or find another partner as Prudential would not be allowed to have two joint ventures in the same country.

Prudential-AIA may face a similar situation in China, where foreign companies are not allowed to have more than one joint venture partner. Citic-Prudential Insurance is a 50-50 joint venture with a 0.5 percent share of China's market.

AIA in China is 100 percent-owned by AIG, with a 1 percent market share. While both shares are small, China is viewed as a key growth market for the combined company.

However, the Shanghai Security News reported on Friday that new draft rules under consideration could allow the two insurers to operate separately in China.

WELL-RECEIVED

Prudential said GIC and Qatar Holdings committed to underwriting a big chunk of the $20 billion rights issue, news that one UK-based analyst said would ease market worries.

GIC already owns a 0.5 percent stake in Prudential, but Qatar does not appear to rank as an existing investor, signaling the UK insurer is inviting in new investors to make the deal a success.

These investors would more than likely have pursued the original AIA IPO. If they still want that same exposure, they now only have Prudential to go to, said Sanford C. Bernstein analyst Toby Langley.

This latent support effectively means the rights issue is underwritten at two levels. It's fully underwritten at the first level by the banks, and if these investors can underpin the deal at the second level, that's a stronger position still.

If that's indicative of the way things are going to go, then initial fears over the rights issue look overdone, Langley said.

Prudential said in its filing that demand for primary underwriting was well in excess of the size of the rights issue.

Credit Suisse , HSBC and JPMorgan Cazenove are acting as joint global co-ordinators and joint bookrunners, it said.

Prudential said it enlisted over 30 global and Asian banks as joint lead managers, co-lead managers and co-managers for the fund raising.

(Additional reporting by Michael Flaherty in HONG KONG, Kevin Lim in SINGAPORE, Myles Neligan in LONDON and Narayanan Somasundaram in SYDNEY; Editing by Valerie Lee and Jon Loades-Carter)

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