(AIG) Prudential PLC Declares Rights Issue to Purchase Unit From American International Group

In order to partly finance its $35.5 billion deal to purchase the Asian life-insurance business AIA Group from American International Group Inc. (AIG), Prudential PLC (PUK) finally announced the details of its previously announced rights issue to raise $20.9 billion (£14.5 billion).

At an issue price of $1.51 (104 pence) each, PUK will offer its shareholders the right to buy 11 shares for every two existing shares in the company.

Apart from the rights issue, the company intends to use debt financing to raise another $5.4 billion to fund the AIA deal. Basically, this debt will be a hybrid capital, which will help protect the buyer institutions against losses. AIG, the seller of AIA Group, has offered PUK to take part in this hybrid capital offering for up to $1.9 billion.

The launch of the rights issue was expected last week, but got delayed subject to an inquiry by the Financial Services Authority, the UK’s financial regulator. PUK is still facing the challenge of gaining approval from its shareholders. At least 75% of shareholders’ approval is required to proceed with the deal. A shareholders’ meeting is scheduled on June 7, 2010.

As per the original deal announced in early March this year, AIG agreed to sell AIA Group to PUK for about $35.5 billion. This included approximately $25 billion in cash, $8.5 billion in face value of equity and equity-linked securities, and $2.0 billion in face value of preferred stock of PUK, subject to closing adjustments.

The cash proceeds would be used to repay the bailout money to the Federal Reserve Bank of New York, which rescued AIG from collapsing in 2008. AIG also sold its American Life Insurance Co. division to MetLife Inc. (MET) for $15.5 billion.

Following the closure of the deal, PUK will have exposure to an additional 20 million customers in 15 countries. However, if unsuccessful, the company will have to pay a termination fee of $230.6 million to AIG.

PUK expects several synergies from the acquisition. The company is targeting a pretax operating profit of at least $4.74 billion (£3.26 billion) in 2013 for the combined Asian business. Additionally, the company expects to more than double the combined Asian new business profit to at least $4.02 billion (£2.8 billion).

Furthermore, PUK expects its combination with AIA Group to deliver $800 million in revenue synergies, higher than $700 million it had previously estimated. PUK also expects cost savings of $370 million, up from $340 million estimated previously.

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