Pru far from prudent in preparing ground for huge takeover bid

LONDON BRIEFING:Prudential's chief has put his reputation on the line with a £24.5bn takeover bid for AIA, writes FIONA WALSH

FOR TIDJANE Thiam, the next three weeks are make or break, both for him and for Prudential, the firm he heads.

The former Ivory Coast government minister has until June 7th to persuade shareholders to back his company’s record-breaking £14.5 billion cash call, launched to help pay for the Pru’s audacious – some would say reckless – £24.5 billion takeover of the Asian insurance business, AIA, owned by bailed-out American insurance group AIG.

It is a deal that will see the Pru more than double in size, making it the largest foreign insurer in the Asian market. But the omens have not been auspicious so far: news of the takeover leaked before it was formally announced to the City of London in March, spooking investors and sparking a plunge in Pru’s shares, which remain under pressure.

Thiam’s reputation has taken a similar knock, not least because of an embarrassing U-turn he had to perform after unwisely accepting a non-executive directorship at French bank Société Générale. The appointment was announced just a fortnight after the AIA deal, leaving shareholders in the Pru with the unsettling impression that their chief executive’s attention was not wholly focused on the insurer’s massive takeover move. City investors, who do not like to be taken for granted, forced him to give up the SocGen post less than 24 hours after accepting it.

There was worse to come, though. City regulators can prove even more troublesome than investors and earlier this month the mammoth fund-raising was derailed for almost a fortnight after the Financial Services Authority raised concerns over whether the Pru would have sufficient capital to protect it against further economic turbulence after the deal.

Thiam and the Pru appear to have taken the regulator’s approval as a given – never a wise move – as the Pru was forced to delay the launch of the cash call at the very last minute. Scheduled calls with journalists, analysts and shareholders were hastily cancelled as it resumed discussions with the regulator.

In the meantime, Thiam had further enraged some of his leading institutional shareholders by failing to make himself fully available to explain the deal. Many complained that they were offered only sketchy details and that meetings were restricted to just 45 minutes.

In his eagerness to pull off what he describes as a “transformational” takeover, and one which was launched a mere six months after he took the helm, Thiam looks to have lost sight of who is paying for it – the City. And when you’re asking for as much as £14.5 billion to help settle the bill, you need to ask very nicely indeed.

The FSA’s concerns have now been satisfied by revised financing arrangements that will give the group enough capital to withstand even a calamitous market and economic collapse, although this has the knock-on effect of increasing the insurer’s costs. The institutions, meanwhile, have been appeased by the offer of more attractive terms to sub-underwrite the colossal fundraising exercise, with fees of 2 per cent rather than the 1.75 per cent they would usually expect.

Terms of the rights issue, revealed on Monday, have also been pitched for success with the new shares offered on the basis of 11 for every two already held, priced at 104p each. This is a discount of more than 80 per cent on last Friday’s closing level, or 39 per cent to the theoretical ex-rights price. In addition, Thiam has outlined larger than expected synergies from the deal and unveiled some impressive first quarter growth figures from the Asian business.

But will this be enough to win shareholder backing? As Thiam and his team embark on an exhaustive charm offensive ahead of the shareholder vote, the outcome is by no means clear. There are concerns that the price is too high and that the deal will take too long to produce a payback. Others fear that the AIA takeover will make the Pru too reliant on a single geographical area, albeit one that looks to have good growth prospects. A number of smaller shareholders have formed an action group to oppose the cash call, which needs approval from holders of 75 per cent of the shares.

If Thiam fails to win on June 7th, it won’t just be the takeover that the Pru will be forced to abandon. Although the company is insisting this should not be seen as a vote of confidence in the chief executive, how can it be anything else? If the fundraising fails, then so does Thiam.

Fiona Walsh writes for the Guardian newspaper in London