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Prudential to Scrap AIA Purchase From AIG, Drop $21 Billion Rights Offer

Prudential Plc’s $35.5 billion takeover of American International Group Inc.’s main Asian unit has collapsed, with the U.K. insurer saying it’s in talks to terminate the deal after failing to win a price cut.

The aborted deal to buy AIA Group Ltd. will cost Prudential about 450 million pounds ($660 million), including a 153 million pound break fee, the London-based insurer said in a statement. Prudential will also scrap a $21 billion rights issue, a record to fund a takeover.

Prudential Chief Executive Officer Tidjane Thiam sought to cut the price by $5.1 billion after shareholders including BlackRock Inc. said the transaction was too costly. The deal’s likely collapse may delay AIG’s plans to repay part of its $182.3 billion bailout and lead to calls for Thiam’s ouster.

“What a mess,” said Ben Collett, head of equities at broker Louis Capital Markets in Hong Kong. “This will make it very hard for Thiam to continue heading the post. Even if they claw back some costs for the deal, it’s still a massive waste, and is anyone in the mood for that in Europe?”

Under the original terms of the sale, the 162-year-old British insurer had to arrange a $21 billion rights offer, the biggest for an acquisition in history, at a time when Europe’s sovereign debt crisis is sidelining corporate fundraisings.

At least 20 companies worldwide postponed or withdrew initial offerings in May as the European debt crisis sent the MSCI World Index of developed-nation stocks down 9.9 percent.

Prudential shares rose as much as 7.1 percent in Hong Kong and were 0.5 percent higher at HK$63.80 as of 11:44 a.m. local time. They have gained 10 percent since started trading on the city’s bourse on May 26.

Execution Risk

“We agreed with shareholders that a renegotiation of the terms was necessary given market movements but it has not proved possible to reach agreement,” Thiam said in the statement today.

AIG Chief Executive Officer Robert Benmosche, 66, may return to an earlier plan of a public offering in Asia to divest AIA, which operates in markets spanning China to Australia and has more than $60 billion in assets.

“Without a doubt, the size of AIA magnifies the execution risk of closing a deal,” said Angelo Graci, managing director at Chapdelaine Credit Partners, a New York-based bond broker. “At this point it’s difficult to see another single buyer come in with a competitive price.”

AIG announced it would divest AIA in October 2008 and last year said it would seek a public listing on an Asian stock exchange. AIG, which was rescued by the U.S. in 2008, could return to its earlier plan of holding a stock offering, the Treasury Department said May 26.

Review Position

“It’s not surprising given that Prudential’s shareholders initially thought AIA had more high-growth China exposure than it did,” said Winston Barnes, head of sales and trading for Asian markets at WJB Capital Group Inc. in San Francisco. “I would expect if Pru doesn’t come back again, AIA would IPO in Hong Kong.”

Thiam, who took over as CEO in October, “will probably have to review his position,” said Paul Mumford, who helps manage 417 million pounds including Prudential shares at Cavendish Asset Management Ltd. in London. Mumford opposed the deal when it was announced in March.

The original takeover offer included about $25 billion in cash and the rest in securities linked to Prudential shares. Prudential’s planned revision to $30.4 billion included $23 billion in cash, the insurer said yesterday.

Break Up?

The combined company would have created the largest life insurer in Hong Kong, as well as in Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam.

Prudential’s shareholders may now favor breaking up the business, according to Rupert Armitage, head of U.K. equities at Shore Capital Group Ltd.

“It leaves them very vulnerable to a break up,” he said in a Bloomberg Television interview. “The chairman and the CEO, having staked their reputations on it, it puts them in an almost untenable position.”

Prudential’s bid was hurt by a series of mistakes in dealing with regulators and shareholders.

Ivory Coast-born Thiam, 47, was criticized by shareholders in March for agreeing to join the board of Paris-based bank Societe Generale SA, a decision he reversed a day later. Prudential was also forced to delay the start of the planned rights offer in May after the U.K. regulator asked the firm to hold more capital in reserve.

Opposition to Deal

Neptune Investment Management Ltd., a London-based investor, said on May 26 it had 20 percent of shareholders to back its opposition to the transaction. Thiam, who needed 75 percent of shareholders to back the offer, made a failed attempt to resurrect the deal by asking AIG to reduce the price two days later.

The takeover was to be the world’s biggest this year, according to data compiled by Bloomberg. The collapse of the deal deprives Prudential’s advisers of as much as 850 million pounds in fees.

Prudential is being advised by Credit Suisse Group AG, JPMorgan Cazenove, Lazard LLC and Nomura Holdings Inc. AIG is being advised by Blackstone Group LP, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc. and Morgan Stanley.