Prudential has entered talks to cut its $35.5 billion offer for AIG's Asian life insurance arm, in a last-ditch bid to salvage a deal criticized by shareholders as too expensive.
Prudential chief executive Tidjane Thiam's future hinges on the success of his audacious bid for American International Assurance, (AIA) launched by the former Ivory Coast government minister in March after less than a year in the top job.
The UK's biggest insurer wants to cut the price to about $30 billion, a reduction of 15 percent, one source close to the deal said, asking not to be named.
Discussions regarding the current status of the transaction have taken place between Prudential and AIG and are continuing, Prudential said in a statement on Friday.
These discussions may or may not lead to a change in the terms of the combination, it said.
A collapse of the deal would be bad news also for Robert Benmosche, the head of bailed-out insurance giant AIG, which is operating with $132 billion in government support and is under pressure to return the money to taxpayers.
The new price negotiations come amid fears the deal, to be funded in part by a record $21 billion rights issue, could fall short of the required 75 percent approval in a June 7 shareholder vote.
The only way that the Pru is going to get a yes vote at the (meeting) is if they manage to get a price cut. In its current form I am almost certain the vote will fail, one Prudential shareholder told Reuters, requesting anonymity.
A $5 billion price cut would certainly get more people on side. We would certainly revisit our view, the investor said.
GLIMMER OF HOPE
Olivetree Securities strategist James Chappell estimated that cutting the price to below $31 billion would give the deal a greater than 50 percent chance of going ahead, compared with about 20 percent now.
Prudential will still need to rebuild relationships with investors and reassure that they can execute on the acquisition, he said.
A large majority of 72 percent said Prudential was paying too much in a Reuters poll of 23 shareholders and analysts on Thursday, while half of the shareholders polled said they expected the company to lose the June 7 ballot.
On Friday, fund managers F&C asset management and Cavendish asset management both said they would vote against the deal.
A no vote would mark an almost unprecedented rejection of a major company's M&A plans by its shareholders, and cast doubt over Thiam's future as Prudential's boss.
He has championed the AIA deal, the insurance sector's biggest ever takeover, arguing that it gives the 162-year-old British insurer a rare opportunity to grab a commanding presence in Asia, the world's fastest-growing financial services market.
Talk among traders the takeover was canceled propelled both Prudentials' shares and the pound sterling higher on Thursday, though they later steadied when the company said the deal was on track.
Earlier this week, voting adviser RiskMetrics told investors to vote against the deal while the influential Association of British Insurers issued its own warning, telling investors to consider their options carefully.
A glimmer of hope is that AIG, which originally planned to offload AIA in an initial public offering, may be willing to accept a lower price because weak equity markets have now made a flotation less attractive.
While we have no feel for AIG's position, we suspect that the IPO valuation of AIA was below $30 billion, Panmure Gordon analyst Barrie Cornes wrote in a note.
Given that the markets have moved south and IPOs have been pulled, we suspect that AIG may well look pragmatically on the renegotiation of the price.
Prudential's London-listed shares were down 0.7 percent at 543.5 pence by 1340 GMT, having risen almost 7 percent on Thursday on market speculation the AIA deal was off.
(Additional reporting by Jimmy Tsim, Vikram Subhedar; Writing by Douwe Miedema, Editing by Lincoln Feast and Mike Nesbit)