Prudential looks East as UK shareholders baulk at AIG deal

After Prudential sees £3bn wiped off its share price, it may start looking East to fund its Asian expansion.

Last Updated: 31 Aug 2010

It’s fair to say that Prudential’s shareholders haven’t reacted with a great deal of enthusiasm to the company’s plan to spend a massive $35bn on AIA, the Asian division of US insurer AIG. After the deal was unveiled on Monday, the Pru lost about a fifth of its value – about £3bn – in 48 hours, as nervous investors rushed to dump the stock. Given the huge cash-call the deal requires, the Pru will have expected this to some extent – but it clearly has work to do to persuade its big institutional investors to play ball. Or, of course, it could just raise the money in the Far East instead…

Despite a slight recovery this morning, the Pru’s share price is still way below last week’s level. This doesn’t amount to a ringing endorsement of the deal, and may even make the Pru vulnerable to a takeover bid itself, some argue. Prudential boss Tidjane Thiam is clearly keen to position this as a long-term play, but investors seem to have shorter-term worries. It will take three months to sort out the massive £21bn rights issue, during which time the stock will be vulnerable to short-sellers. There’s also a question of how long the deal will take to stack up financially; some argue Thiam is paying so much that it could take years to see a return (which is hard to justify, even for a long-only fund manager). According to the Times, several big investors will be shunning the rights issue as a result.

The Pru was always going to have a hard time raising this money from existing shareholders; most would basically have to double their holdings, which is a lot to ask even in the most benign of economic climates. But although some of the big UK-based shareholders clearly feel that Thiam should be showing them a bit more love, it’s hard to argue that he’s done the wrong thing by flying to Hong Kong to meet his potential new staff. Besides, he does have a back-up plan: if he’s running short of funds, he’ll probably be able to raise them from big investors in the East instead. The FT reckons the Pru is already talking to sovereign wealth funds in the region about buying into the deal, with the Wall Street Journal today naming Singapore-based Temasek as one of its potential partners.

Nobody seems to doubt that this deal will pay off for the Pru eventually. So it would be a shame if UK investors were to lose out, just because they’re forced to work on a shorter-term investment horizon that some of these Eastern funds...

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