How embarrassing. Prudential's ambitious $35.5bn acquisition of AIA, the Asian assets of state-owned US insurer AIG, descended into chaos yesterday. The UK company unexpectedly delayed its planned $21bn rights issue and interim management statement. Instead it offered investors 268 words of explanation and deal justification – and six times as many of backside-covering disclaimers. Although in its missionary zeal Prudential appears to have garnered outline approval from most of the 15 Asian regulators involved, it has yet to convince its home regulator, the Financial Services Authority. The latter is rightly concerned about the enlarged group's capital position and whether, in an emergency, UK-based Prudential could count on AIA capital trapped in, say, Thailand. The concerns have delayed the deal, yet Prudential insists they will not derail it. Investors may disagree.
Bizarrely – nay, presumptuously – it had primed them to expect rights issue pricing and its first-quarter IMS yesterday while still locked in solvency discussions with the FSA. Given the FSA's poor record on bank supervision prior to the financial crisis and the scale of Prudential's deal, its caution is understandable. Nor, as it ponders an uncertain future after the UK election, should it be railroaded by the frenetic timetable of Prudential's new empire builders. The issue is less existential for the FSA than it is for Prudential.
The insurer has damaged its chances of winning shareholder approval, especially those familiar with Warren Buffett's recent advice to Berkshire Hathaway shareholders on a railroad investment. He said: “You simply can't exchange an undervalued stock for a fully valued one without hurting your shareholders.” But, for investors in Prudential, trading around 1 times embedded value – yet poised to pay 1.7 times for AIA – the FSA's concerns are a reminder that capital adequacy is Prudential's key issue.