In the sixth-largest foreign acquisition by a British firm on record, Britain's largest insurer, Prudential, has agreed to take over AIA, the Asian unit of the stricken US insurance giant AIG. The Pru will pay $35bn (£23bn) 50% more than its own market capitalisation. Of that sum, $15bn will be paid in shares and $25bn in cash. The latter comprises a $5bn debt issue and a $20bn (£13.5bn) rights issue, the largest ever seen in London.
"Transformational" is how chief executive Tidjane Thiam described the deal. And it certainly is, said John Foley on Breakingviews. The new entity would be "the most comprehensive pan-Asian insurer in the business" and the market leader in most Asian countries, notably the key ones of Hong Kong, Singapore, Malaysia and Indonesia.
It would also be the number-one foreign insurer in India and China. The local market is soaring as regional wealth burgeons. The value of the Pru's new business in Asia has risen by nearly 30% a year in the past decade. The price doesn't look bad either, said Lex in the FT. At 1.7 times embedded value, a common insurance valuation gauge, it's in line with typical insurance multiples in the region.
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Yet supposedly "transformational" big and complex deals often fail to deliver value, said Nils Pratley in The Guardian. Integrating the two companies will be no mean feat, given that AIA alone has 320,000 sales agents. And $340m of cost savings doesn't sound like much when the Pru is splashing out $1bn on bankers. That's money it could have deployed on the Asian business if it had kept expanding organically there. It will be years before we can be sure if the deal really will deliver a good return.
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Investors, it seems, aren't yet convinced either, said Leo Lewis in The Times. Along with the rights issue, which dilutes investors' holdings, jitters over whether the Pru is overreaching wiped 20% off the shares in just two days after the deal was announced.
PRU: 505p; 12m change 84%
