Abigail Hofman: Prudential and AIA – 'Plan B'
There is often a transaction that defines a period. It’s the financial equivalent of remembering where you were when Princess Diana died or John F Kennedy was shot.
The bonfire of the vanities debt binge in the late 1980s gave us the leveraged buy-out of RJR Nabisco. The 1990s was all about the dotcom dance: an ill-defined blur of absurd valuations and chants of "it’s different this time", culminating in the Vodafone $200 billion acquisition of Mannesmann. This marked the end of the third-generation hype and the TMT sector as we knew it. TMT stood for technology, media and telecoms. If you were a banker, that was the only area to be in. Although of course no-one wanted to be a banker anyway in those days; we were all trying to set up internet companies with someone else’s money.
So where will Prudential plc’s $35.5 billion acquisition of AIA, AIG’s Asian business, fit in to this roll call? It is certainly a deal that takes your breath away. The Pru is paying 50% more than its own market capitalization for AIA. It is a huge bet on the east: if consummated more than 60% of the company’s new business profit should come from Asia. "It is a strategic deal of swashbuckling proportions," an insurance expert told me.
In one respect this deal is indeed different. It does not rely on debt but on equity financing. The debt component of the financing package is small: some $5 billion. However, the Pru will launch a $21 billion share offering: the largest ever rights issue in British corporate history. This will not take place until late May. The deal was announced in early March. Markets could go anywhere in the intervening three months so there is a lot of market risk for the three underwriting banks: Credit Suisse, HSBC and JPMorgan. The banks will be very well paid for taking this risk: the fees could be as much as $1 billion. I understand that HSBC did the foreign exchange hedging for the Pru, which should also have been very profitable. "The important thing is that the revenue will be included in the banks’ second-quarter results," a banker on the deal purred.
Then there are the colourful characters involved. Tidjane Thiam took over as chief executive of Prudential only five months ago. A former McKinsey partner and government minister in Côte d’Ivoire, he is not your normal, staid British businessman. He is risking everything on this transaction and is evangelical about its rationale and valuation. The protagonist at AIG is Bob Benmosche, the forthright and feisty chief executive who was brought out of retirement to turn around the stricken US insurer. Since his appointment last August, AIG’s share price has more than doubled. Credit Suisse sits snugly between the two men. It is Prudential’s financial adviser. A core Credit Suisse team has worked on the deal since last November. "Sebastian Grigg is the only banker who travels everywhere with Thiam," a mole whispers respectfully. Grigg is head of UK investment banking at Credit Suisse.
The intriguing part of the AIA acquisition is that the business wasn’t for sale in early 2010. AIG were planning to float AIA on the Hong Kong Stock Exchange and had mandated Morgan Stanley and Deutsche Bank as global coordinators for that deal. So Credit Suisse effectively crashed the flotation party. The bank that was going to derail the AIA flotation had to have an excellent relationship with Benmosche, a key decision maker. It is interesting to note that Benmosche sat on Credit Suisse’s board until he went to run AIG. I would infer that Benmosche respected and trusted Credit Suisse’s chief executive, Brady Dougan, and Paul Calello, the head of Credit Suisse’s investment bank. When they called with "Plan B", Benmosche took the call seriously.
There was a vital meeting on Friday February 26 when Thiam had to convince the AIG board and US officials (remember the US government owns some 80% of AIG) that his bid was viable. In other words if the AIA flotation were cancelled, the taxpayer would still receive its money. At that meeting, held at AIG’s Pine Street headquarters in lower Manhattan, Thiam was apparently flanked by Dougan and Jamie Dimon, JPMorgan’s chief executive. As an ex-banker, I know it’s virtually impossible to get your chief executive to come to a pitch on short notice – and remember that Dougan is based in Zurich. But the US Treasury is a conservative institution and I assume that Jim Millstein, the Treasury official handling AIG, wanted to look into the eyes of the bank bosses and ask: "Do you stand behind this deal?" A mole insists that as the tempo of discussion quickened, charismatic Dimon thumped his fist on the table and declared: "This deal is good for AIG and it’s good for America!" Another source says: "As far as I know, Dougan did most of the talking. After all, JPMorgan had only been brought in to the deal a week earlier." Not everyone wants the deal to succeed. The bankers ousted from the IPO ticket must be incandescent with fury. Someone leaked the news of the important AIG board meeting before it started, to Mark Kleinman, scoop-meister extraordinaire, at Sky TV. Who was deep-throat, I wonder? This led to an unseemly scramble at the weekend to finalize the terms of the deal, which meant that Prudential shares were briefly suspended on Monday morning. Add in to this heady mix a floundering Prudential share price, which fell 20% in the two days following the announcement of the bid, as well as disgruntled UK shareholders, and you have a bubbling cauldron. I hear that three top, opinion-forming, institutional investors (Capital World, BlackRock and Norges Bank) were contacted before the deal’s announcement and gave their support, which is reassuring. But if Capital World wants to avoid dilution of its stake, it might have to purchase more than £1 billion ($1.5 billion) of shares in the rights issue. That’s a big number.
The Prudential/AIA deal is the largest cross-border transaction to be announced since Lehman went bankrupt in September 2008. For the three banks on the top line, the deal is a source of joy as well as risk: welcome once again to a world where bankers can hold their heads up and claim to be creative and committed. But for those banks that missed out on a main role, ignominy looms. One understands of course that Morgan Stanley and Deutsche were conflicted and couldn’t change direction.
However what about two houses that are normally associated with financial institution deals: Merrill Lynch and UBS? It is embarrassing for these firms not to be on the top line especially as UBS was the company’s corporate broker. The whole rationale for a corporate broker, a very British concept, is to act as a sounding board for the chief executive as regards equity investors. Personnel turnover perhaps partly explains the omission of UBS. Robin Budenberg, who had been UBS’s lead banker to the Pru, left late last year to run UK Financial Investments, the government’s vehicle for managing its bank stakes. But where is that deep bench of talent that investment banks love to boast about? And of course, UBS, clawing its way back to profitability, could have done with the revenue. "We were conflicted," a mole moans mournfully. "We had another candidate who was interested in AIA. We backed the wrong horse!"
In the end, it comes down to a potent combination of personal relationship, access and the big idea. The Credit Suisse team had all of this: the relationship with Thiam, the idea that Prudential should look again at buying AIA (they had considered the purchase previously in early 2009) and senior management access to Benmosche. So Credit Suisse, for the time being, looks canny and smart. But if market conditions collapse, Credit Suisse could end up crestfallen and sobbing. Who can predict the future? I will watch with interest how markets evolve and the execution of the rights issue.
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