British insurer Prudential Plc unveiled a $21 billion cash call as it tried to put its takeover of AIG's Asian unit back on track and launched a charm offensive to woo wary shareholders.
Britain's Financial Services Authority had forced the country's largest insurer to tweak its $35.5 billion offer for AIA in an embarrassing and unprecedented last-minute delay nearly two weeks ago, telling it to boost its capital.
Prudential Chief Executive Tidjane Thiam -- in the job less than a year -- on Monday laid out his agreement with the British watchdog, a key step to rescuing a deal that will help bailed-out rival AIG repay the U.S. government.
Pru shareholders remained skeptical of the heavily discounted share sale, the largest ever to finance a takeover. But Thiam said he was confident of his plans to make Pru the largest foreign-owned insurer in rapidly growing Asia, arguing a step change would not have been possible through organic growth.
Overall we feel confident they (investors) will support this. We always knew this would be a long, complex and challenging process -- what we are attempting has never been attempted before, Thiam said.
Prudential will benefit from money already set aside when AIG was considering an IPO of its Asian unit American International Assurance (AIA), Thiam said.
The company brushed aside speculation that Thiam, whose credibility has been dented by the regulatory hitch, would have to step down if shareholders did not back the deal on June 7. Pru needs 75 percent of voting stock to be cast in favor.
We see it as a vote of confidence in the deal, not in management, Chairman Harvey McGrath told reporters.
Prudential will sell new shares at 104 pence, a 39 percent discount to the theoretical ex-rights price (TERP) -- in line with rights issues in the financial sector through the crisis -- and an almost 81 percent discount to Friday's close.
But modest improvements to synergies and hints at Asian disposals may not be enough to win over the support needed to secure the deal and salvage the tarnished credibility of Pru's management, as they begin meetings with investors on Tuesday.
The vote is a really, really difficult one to call ... It's a big issue and we are at a very volatile point in markets, said one top-20 investor, declining to be named.
As part of the charm offensive, Pru and its banks will offer fund managers a fat sub-underwriting fee of 2 percent. They normally get 1.5-1.75 percent out of a total 3.5 percent.
Shares in Prudential, supported in recent weeks on bets the rights issue could be canceled, recovered from an early setback to close down 1.5 percent at 535p versus a 0.7 percent drop in the European sector.
Despite speculation, frantic negotiations over the past few weeks have not resulted in changes to the value of Prudential's record offer, but it has tweaked the terms to boost the level of capital held by the group and reassure regulators.
Prudential will also issue one or more bonds to help finance the deal. AIG, which will own around 11 percent of Prudential after the deal, has agreed to buy up to $1.88 billion worth of the debt if Pru cannot sell it to the market. This would lower the roughly $25 billion cash component.
Beyond the deal, Prudential has secured a 1 billion pound debt facility -- dubbed the armageddon fund -- to reassure regulators its solvency capital can cope with extreme shocks.
Prudential hopes to double Asian earnings by 2013 and raised its synergy targets, saying it now expects annualized new business profit revenue synergies of $800 million from an initial $700 million and cost synergies of $370 million, up from $340 million, during 2013.
Those savings are unlikely to blow away investors, but the insurer hinted at scope for further capital releases, increased dividends from AIA and confirmed the expected disposal of assets where it faces regulatory demands. This includes selling AIG's unit in India, where Tata Group has a right of first refusal and is already in very advanced talks around price.
A sale of the enlarged group's assets in China -- where it will not be allowed to retain 100 percent of the business -- could take longer.
Pru declined to rule out the possibility that the company could go beyond mandatory Asian sales and put its domestic British unit on the block as it focuses on Asia. But they said nothing was included in the 1,000-page prospectus, indicating no deal is imminent. There is nothing sacred, Thiam said.
The rights issue is underwritten by Credit Suisse, HSBC and JP Morgan. Boutique Ondra Partners provided advice to Prudential. Nomura and Lazard also worked for Prudential.
(Additional reporting by Douwe Miedema, Myles Neligan, Raji Menon and Paul Hoskins; Editing by Erica Billingham and David Holmes)
($1 = 0.6859 pound)