Prudential considers sovereign wealth to fund bid for AIG

From The Times
October 20, 2008

Steve Hawkes

Prudential is considering handing a 20 per cent stake to a sovereign wealth fund to bankroll a bid for part of AIG, its stricken American rival.

Britain's second-largest insurer has appointed Credit Suisse to lead talks with potential investors across the Gulf and the Far East. Mark Tucker, the Prudential chief executive, will confirm the move when the group reports its third-quarter new business figures tomorrow.

He is believed to want parts of AIG's business in Asia, where the American company is the market leader, ahead of the second-placed Prudential. The operations are being sold after AIG's $85 billion (£49 billion) emergency bailout loan from the US Government.

Sources close to Prudential said yesterday that the company was under no pressure to raise funds to bolster its balance sheet and that any stake sale would take place only to finance a deal with AIG. Prudential is expected to say tomorrow that its surplus capital remains well in excess of £1billion.

Prudential shares plunged last week amid fears that the company may have to tap investors for money and cover any exposure to the collapsed American entities Fannie Mae, Freddie Mac, Lehman Brothers and Washington Mutual.

Four years ago Prudential famously denied that it was considering a rights issue before pressing ahead with a £1 billion cash call. The U-turn was one of the reasons that Jonathan Bloomer lost his job as chief executive.

Executives at the insurer believe that a rights issue would be all but impossible in the present economic climate. The Pru is understood to be willing to issue new shares equivalent to about 20 per cent of the enlarged business, worth about £1.3 billion.

Potential investors include the Qatari Investment Authority, the sovereign wealth fund that owns stakes in Barclays, J Sainsbury and the London Stock Exchange and is also advised by Credit Suisse.

Any sale would mimic last year's deal between the China Development Bank (CDB) and Barclays, whereby the CDB took a 3.1per cent stake, for €2.2 billion, to give the British bank more muscle in the bidding battle for ABN Amro. Barclays lost out to Royal Bank of Scotland, but CDB remained on the shareholder register.

Prudential is expected to face intense competition for AIG's Asian assets. AXA, the French insurer, is regarded as its most likely rival. A success for Prudential would go some way towards erasing the memories of the group's failure to complete a huge deal in the United States in 2001, when it lost out to AIG in a battle to buy American General.

Analysts say that Prudential's Asian business is the jewel in its crown. It was run by Mr Tucker in a previous spell with the company.

Direct Line and Churchill could soon be in the hands of private equity after it emerged that CVC was lining up a bid for two of Britain's best-known general insurance brands. CVC is understood to have teamed up with Swiss Re, the world's largest reinsurer, to make a bid for the insurance unit of Royal Bank of Scotland, which includes Direct Line, Churchill and Linea Directa, Spain's largest direct insurer. CVC was linked with a bid for the business this year. Any offer would be led by Fred Watt, the former chief operating officer of RBS, who joined CVC last year. RBS Insurance employs 18,000 staff. It is the UK's largest motor insurer and second-largest home, travel and pet insurer.