British insurer Prudential plc is withdrawing from a $35.5 billion deal to buy American International Group Inc's Asian life insurance business AIA, paving the way for a potential listing of AIA.
The widely expected move by Prudential on Wednesday came after AIG knocked back a lower offer from it a day earlier, and would help the British firm avoid an embarrassing defeat at the hands of shareholders next week.
We listened carefully to shareholders over the price and initiated a renegotiation of the terms with AIG. Unfortunately, it has not been possible to reach agreement, Pru Chairman Harvey McGrath said in a statement.
We are therefore withdrawing from the transaction.
Prudential's Hong Kong-listed shares jumped as much as 7.1 percent to HK$68.00, tracking a 6.3 percent rise in its London-listed shares on Tuesday. But the stock was trading down 0.6 percent by 0400 GMT, a level at which bulk of the morning trade took place.
A failed deal, which was slated to become the biggest insurance M&A deal in history, is likely to make the position of Prudential's management untenable and increase the call for a break-up of Pru, analysts and fund managers have said.
Chief Executive Tidjane Thiam, who has been in the job less than a year, had championed the AIA deal, arguing that it gives the 162-year-old British insurer a rare opportunity to grab a commanding presence in Asia.
As a result of the withdrawal move, Prudential <2378.HK> said it would not proceed with a $21 billion rights offering in London and Hong Kong designed to raise money to finance the deal.
Pru estimated the cost of the failed AIA transaction so far at about 450 million pounds ($659 million), which includes a break-up fee of 152.6 million pounds.
The British company did not say that the AIG agreement has been formally terminated but said in the statement that it was expected.
AIG Chief Executive Robert Benmosche was in favor of accepting the deal on revised terms as it offered more liquidity, and sooner, one person familiar with the situation told Reuters.
But the board, which met late on Monday, decided against doing so. One important sticking point was that AIG's board wanted assurances from Prudential that it would be able to close a revised deal, other sources familiar with the matter said.
Prudential was not able to provide the assurances AIG's board was seeking, said the sources, who declined to be identified as the talks were confidential.
The U.K. insurer originally offered $35.5 billion for AIA, then lowered it to $30.4 billion amid resistance from shareholders that the company was overspending.
AIG is most likely to revive the initial public offering of AIA once the deal is officially terminated.
But there are doubts whether an IPO could fetch the same valuation offered by Pru.
Then there is also the issue of timing the market so as not to clash with the flood of Chinese bank capital raising slated to hit the market later this year. Capital hungry Chinese lenders are set to raise up to $60 billion in new capital in the next 6-8 months.
Benmosche told employees in an internal memo that AIG would have several options to consider regarding AIA -- more than it did in March. AIG, nearly 80 percent owned by the U.S. government, also would have more flexibility on timing, he said.
These options include selling parts of the AIA business by geography, two of the sources said.
AIG took advice from Citigroup , Morgan Stanley , Goldman Sachs , Blackstone and Deutsche Bank , according to Thomson Reuters data.
Credit Suisse, HSBC and JPMorgan Cazenove were leading Prudential's rights issue as joint sponsors, global co-ordinators and bookrunners.
They were joined as financial advisers by Ondra Partners and Lazard , while Nomura <8604.T> gave a fairness opinion to Prudential's board.
A further 30 banks were joint- or co-lead managers or co-managers for the rights issue.
(Reporting by Michael Flaherty and Denny Thomas; Editing by Muralikumar Anantharaman and Jean Yoon)