Prudential PLC on Monday announced a rights issue to raise 14.5 billion pounds ($20.9 billion) to help finance its $35.5 billion acquisition of the Asia-based life insurer AIA Group from bailed-out U.S. insurance firm AIG.
The announcement had been expected last week but Prudential was delayed by questions raised by the Financial Services Authority, the U.K. financial regulator.
Prudential shares fell 5 percent to 515 pence in early trading on the London Stock Exchange.
"We believe that there is very little downside risk in the share price," said Barrie Cornes, analyst at Panmure Gordon. He believes Prudential shares will bounce back whether not the deal goes through, but he cautioned that "it is very early to form a cast iron view."
Cornes and Shore Capital analyst Eamonn Flanagan both reiterated "buy" recommendations on the stock.
Prudential is offering 11 shares for every two existing shares in the company at an issue price of 104 pence (or HK$11.78 for shareholders in Hong Kong and Singapore).
The company said Monday that the issue price represented a 39 percent discount based on the expected market price following completion of the rights issue, or a steep 80 percent drop from Friday's closing price of 542.5 pence.
Prudential also said it plans debt financing to raise $5.4 billion, and AIG, the bailed-out U.S. insurance company which is selling AIA, has offered a standby commitment to subscribe to up to $1.9 billion of that financing.
In a separate trading update, Prudential reported record new business sales of 807 million pounds in the first quarter, a 26 percent increase from a year earlier. New business profit was up 27 percent to 427 million pounds.
"We have the team, the skills and the discipline to successfully integrate these businesses and achieve the targets we have announced today," said Group Chief Executive Tidjane Thiam, for whom the deal looms as a make-or-break career moment.
"We believe that, through capital management and portfolio rationalization, there will be opportunities for the combined entity to create additional shareholder value over and beyond the revenue and cost synergies identified," he said.
The Financial Services Authority has refused to discuss its concerns on the deal, but Prudential said it had agreed with the regulator on future supervision of the enlarged group, "including on the capital that it will be expected to hold."
Prudential has said the combined group would be the leading life insurer in Hong Kong, Singapore, Malaysia, Indonesia, Vietnam, Thailand and the Philippines, as well as the biggest foreign life insurer in China and India.
American International Group Inc., which received more than $180 billion in aid from the U.S. government during the financial crisis, hopes to raise $51 billion from the Prudential deal plus $15.5 billion by selling its American Life Insurance Co. division to MetLife Inc.
It hopes to complete both deals this year.
If the AIA deal falls through, Prudential will owe AIG a termination fee of $230.6 million.
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