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May 17, 2010 Monday 7:53 AM EST
SECTION: NEWS & COMMENTARY
LENGTH: 579 words
HEADLINE: Prudential launches delayed $21 bln rights issue
BYLINE: Simon Kennedy, MarketWatch mailto:email@example.com.
Simon Kennedy is the City correspondent for MarketWatch in London.
LONDON (MarketWatch) — U.K. life insurer Prudential on Monday launched its delayed 14.5 billion pound ($21.4 billion) share sale to finance the acquisition of American International Group’s Asian operations after satisfying U.K. regulators that it can maintain enough capital.
Prudential (PRU) (PUK) said shareholders will have the right to buy 11 new share in the group for every two they already hold at a price of 104 pence each. This type of sale, known as a rights issue, is a common way of raising cash among European companies.
The sale price is an 80.8% discount to the closing level of Prudential shares on Friday and a 39.3% discount to the theoretical price following the completion of the sale.
The insurer had been planning to launch the rights issue toward the start of May but had to delay the plan after the Financial Services Authority raised concerns over the level of capital it would be left with.
Prudential, which is buying the AIA business from AIG (AIG) for $35.5 billion, said it’s amended the terms of a debt offering to include $5.4 billion of hybrid capital — a type of debt that is converted into equity under certain circumstances in order to boost capital.
AIG has also agreed to subscribe for up to $1.88 billion of hybrid capital if necessary, and there’s also a £1 billion contingent loan available to Prudential if it’s needed.
Under the new plan, Prudential calculates it will have £5.2 billion of surplus capital once the deal is completed.
CEO Tidjane Thiam said the delay to the rights issue had been embarrassing but added that it had been an issue of having enough time for the company and the FSA to work out the details.
“The reality is that at one point they called us and said we just need more time to look at this,” Thiam said on a conference call.
Shares in Prudential, which is not associated with the U.S. firm of the same name, dropped 0.3% in London to 541 pence.
The stock is down around 17% since the start of the year, driven by worries over the size of the AIA deal and the problems Prudential will face integrating the two companies.
Analysts at Killik & Co. said there will be a “huge execution risk” from attempting to merge the two companies, noting for example that the combined business will have a 675,000-person sales force.
However, the broker added that if shareholders can be persuaded to back the deal it could still be attractive in the long term.
“The enlarged group will be well placed to benefit from demographic trends — such as increasing life expectancy and falling birth rates — which will force people in the region to save for their retirement,” Killik analysts said.
Media reports have indicated that several investors have concerns about the deal, but Thiam said Monday that the company had been “fighting with one hand tied behind its back” because up until now it has been limited on what it can tell shareholders.
He said there is scope for the value of the acquired business to grow by 80% over the next few years as Asia markets expand and that the group has identified cost savings and potential revenue synergies of $1.17 billion a year that can be achieved by 2013.
It also hopes to double pretax operating profit for the combined Asian business to at least £3.26 billion by 2013.
Shareholders are due to vote on the plans on June 7.
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