British insurer Prudential launched its long-awaited $21 billion cash call and a delayed offensive to woo wary shareholders to back its takeover of rival AIG's Asian unit.
The UK's Financial Services Authority forced the country's largest insurer to revise its $35.5 billion offer in an embarrassing and unprecedented last-minute delay nearly two weeks ago, telling it to boost capital.
Monday's pricing of the deeply discounted rights issue and details of the agreement with the UK watchdog have put the deal -- a key part of plans to help AIG repay the U.S. government -- back on track, and Chief Executive Tidjane Thiam said he was confident shareholders would back the takeover.
We were a little bit like a fighter fighting with one arm behind his back. We were handicapped, we weren't able to answer a lot of questions, Thiam said of conversations with shareholders in recent weeks, adding investors had given Prudential the benefit of the doubt.
Overall we feel confident they will support this. We always knew this would be a long, complex and challenging process -- what we are attempting has never been attempted before.
Prudential will benefit from money already set aside when AIG was considering an IPO of its Asian unit American International Assurance (AIA), Thiam said.
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 financial crisis -- and an almost 81 percent discount to Friday's close.
But shareholders indicated that modest improvements to synergies and hints at Asian disposals may not be enough to win over the 75 percent support needed to secure the deal and salvage the tarnished credibility of its top management.
I don't think it's going to be easy for them to get the backing of enough shareholders. They will struggle to get the vote through, said one top-20 investor, asking not to be named.
Paul Mumford, of Cavendish Asset Management which has a 2.5 million pound holding in Pru, said he was still concerned over the size of the cash call, one of the largest ever.
Personally, I'm feeling a bit dubious as to whether it is the best thing for shareholders. They have got some punchy targets looking forward in terms of profitability of the group, but it does rely on the Far Eastern markets -- they have got more eggs in one basket than before the issue, he said.
Prudential and its banks will offer fund managers a fat sub-underwriting fee of 2 percent, sources familiar with the situation told Reuters. They normally get 1.5 percent to 1.75 percent out of a total 3.5 percent.
Shares in the Pru, supported in recent weeks on bets the bumper rights issue could be canceled, were down 2.3 percent at 4:13 a.m. ET at 530 pence, underperforming the European sector <.SXIP> and a 0.3 percent rise in the FTSE index <.FTSE>.
To secure FSA backing, Prudential slightly altered the terms of the deal to boost the level of capital held by the group. It said its debt financing arrangements were revised to include a facility of $5.4 billion of hybrid capital.
It has also secured a debt facility of 1 billion pounds to enhance its solvency capital if it hits trouble.
Prudential separately published a 32 percent rise in AIA sales in the first quarter, alongside its own record numbers.
Prudential raised its synergy targets for the deal, saying it now expects annualized new business profit revenue synergies of $800 million and cost synergies of $370 million during 2013.
It also confirmed the expected disposal of part of the enlarged group's assets in China, where it will not be allowed to retain 100 percent of the business, some shake-up in Malaysia, and the sale of AIG's unit in India.
Thiam declined to comment on speculation Prudential could sell its already reduced UK unit as it continues to focus on Asia, but said discipline would be applied across the board.
Any business or product line that does not meet our criteria will be dealt with, he said.
Shareholders will meet on June 7 to vote on the deal, which is expected to be completed in the third quarter.
(Additional reporting by Douwe Miedema, Myles Neligan, Raji Menon and Paul Hoskins; Editing by Erica Billingham)