Prudential's journey east has begun in earnest. The UK-listed financial services group's $21bn rights issue to part fund its purchase of AIA has been priced to be taken up by Asian investors. Shareholders concerned by the ambitious $35.5bn acquisition could seize on the deeply discounted 104p issue to sell some or all of their rights. Demand is unlikely to be a problem: until Prudential's offer, Asian investors were preparing to buy AIA shares directly via an initial public offering. Now they can place a bigger bet on developing Asia's financial services markets. Nor need Prudential fear investor apathy: its cash call, launched into markets gyrating to the dance of Greek contagion, is fully underwritten by Credit Suisse, HSBC and JPMorgan Cazenove. They can always offload shares to the same investors.
The rights issue only proceeded because Asia-headed Prudential managed to address the capital concerns of the Financial Services Authority, its home regulator. By switching senior debt to quasi capital, its capital cushion will rise to ￡5.2bn. Prudential also has ￡1bn of contingent subordinated debt, similar to Lloyds Banking Group's contingent convertibles in effect, but converting into qualifying debt capital if Prudential's buffer falls below the FSA's limit.
However compelling a combination spanning Asia, Prudential still faces obstacles. Small improvements in synergy targets may not sway investors, nor a few disposals here and there. The valuation gap is the main headwind: the UK insurer trades at around 1 times its embedded value; AIA trades at 1.7 times. Even if investors can stomach that, Prudential must convince them that it can safely execute the deal. The future of Tidjane Thiam, chief executive, is either in Asian investors' hands – or in the cold.