INSURANCE giant Prudential is understood to have reached an agreement with the City regulator to enable its mammoth Asian takeover to go ahead, according to reports.
The group is thought to have agreed to set up a £1bn backstop fund to meet the Financial Services Authority’s (FSA) concerns about the adequacy of its capital reserves following the acquisition of AIA, the Asian arm of US insurer AIG.
It is expected to outline the terms of the agreement today, which would enable it to continue with the US$35.5bn (£24bn) deal.
Prudential surprised the markets last week when it cancelled plans to give shareholders details of its record US$21bn (£14.2bn) fundraising to finance the move following objections from the FSA.
Details of the FSA’s concerns have not been made public, but Prudential said they centred on the capital position of the enlarged business.
The insurer is understood to have dubbed the £1bn backstop fund “Armageddon money”, as it would be used to cope with a one-in-100-year economic downturn.
The FSA is understood to have been concerned about how easy it would be to get money out of AIA’s Asian businesses and back to the UK under local regulations if it was needed.
Prudential is also thought to have agreed to alter the details of its rights issue to fund the takeover in order to placate the FSA.
But there is speculation that the agreement with the FSA may have come too late and that shareholders, who were already unhappy with the takeover, may refuse to back it.
Shareholders have voiced concerns about the size of the deal and how easy it would be to integrate the two companies.
They are also unhappy about the money they are being asked to stump up to finance it. As well as raising £14.2bn from shareholders, the group plans to fund the rest of the deal through issuing debt and selling a stake of around 11% of the enlarged company to AIA shareholders.
Prudential shareholders had been due to vote on the takeover on May 27, but it is thought this is now likely to be postponed.
A Prudential spokesman declined to comment on the report.
Meanwhile, another report suggest that four leading Prudential shareholders now expected the rights issue to fail and that the group’s chief executive Tidjane Thiam would be called on to resign.
Prudential has said that, despite the setback with the FSA, it still expects the transaction for AIA to occur during the third quarter of 2010.
If the takeover does go ahead, it would make Prudential the biggest insurer in Asia, but if it fails there is speculation the group could be taken over or broken up.
If the takeover does go ahead, it would make Prudential the biggest insurer in Asia