AIG Suffers Setback in Repayment of Bailout Money

Published: Wed 02 Jun 2010

Wendy Blair

Prudential PLC, a British insurance group, has officially retracted its offer for American International Group's Asian life insurance arm, the AIA Group.

The news came one day after the once-untouchable AIG rejected Prudential's attempt to reduce the selling price by $5 billion. Originally, Prudential offered $35.5 billion for AIA, but the subsequent efforts to raise funds rankled shareholders. The London-based insurer then changed its bid to slightly under $30.4 billion, to include $23 billion in cash, $2 billion in notes, and $5.375 billion of stock in the two companies.

AIG shares reacted positively to the announcement, rising 75 cents, or 2.2 percent, to $35.00, during Wednesday's late-morning trading. By contrast, American depositary receipts of Prudential fell 17 cents, or 1.1 percent, to $16.36.

"While AIA was an excellent opportunity, since we announced the potential transaction we have seen significant falls in the market," explained Harvey McGrath, Prudential's chairman.Reasoning behind the Price Drop

The corporation reduced its bid price in an attempt to placate disgruntled shareholders. The dissenting shareholders created an organization entitled the Prudential Action Group, with the purpose of effecting a no-confidence vote against CEO Tidjane Thiam.

Robin Geffen, a member of the Neptune Investment Management group that led the opposition against the AIA purchase, said common sense carried the day. "From the beginning it has been an absurdly ambitious attempt by the Pru to buy a large Asian company, at a very high price, with a very unclear strategy," he explained.

Prudential has reported that the falling through of the deal would cost the company roughly 450 million pounds, or $662 million.

Broken Deal Sets AIG Back

Faring even worse from the defunct deal are American taxpayers, who loaned AIG $180 billion in bailout money in 2008. The setback will likely make it more difficult for AIG, the majority of which is owned by the American government, to repay taxpayers' money. AIG was counting on the $35 billion from the sale of AIA to begin repaying the government immediately.

Because AIG needs the money from the sale of AIA desperately, it will now probably turn to Plan B-selling the Asian life insurance group through an initial public offering, most likely on the Hong Kong stock exchange.