Tidjane's test

17 May 2010 By Peter Thal Larsen Follow @Peter_TL

The UK insurer has tweaked the terms of its delayed $35.5 billion takeover of AIG’s Asian operations, and upped its estimate of the deal’s financial benefits. The changes have eased the UK regulator’s concerns. But they offer little reassurance to Pru’s sceptical shareholders.

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Prudential on May 17 published details of its revised $35.5 billion takeover of the Asian arm of AIG, the U.S. insurance group.

The UK insurer also priced its record $21 billion rights issue. Shareholders will be given the opportunity to subscribe for 11 new shares for every 2 Pru shares they own at a price of 104 pence per share.

The rights issue price represents a discount of 39.3 percent to the theoretical exrights price.

Pru said it had tweaked the financing of the original deal to appease the UK's Financial Services Authority, which had raised concerns about the combined group's capital position.

The company has revised its debt financing to issue $5.4 billion of hybrid capital which counts towards its capital reserves. AIG will provide a standby commitment to subscribe to up to $1.875 billion of this capital if Pru cannot find other buyers.

Banks have also agreed to provide a 1 billion pound subordinated debt facility which the company can draw down if it runs into financial trouble in the next two years.

The company said the revised package would increase its annual aftertax financing costs by 110 million pounds.

Pru also increased its forecast pretax revenue synergies to $800 million a year, from about $700 million, and said the combined group would cut annual costs before tax by $370 million, up from a previous forecast of $340 million. By applying Pru's accounting policies, it revised AIA's embedded value to $22 billion, from $21 billion.

It forecast that the combined group would double its earnings on an IFRS accounting basis by 2013, and that AIA would be able to remit $1 billion a year in cash to the group in order to support dividend payments.

Pru also published firstquarter new business sales of 804 million pounds for the first quarter, a record.

By midday in London Pru shares were down 5 pence at 537.5 pence.

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