American General-Prudential PLC merger in jeopardy

The proposed merger of Prudential PLC of London and American General Corp. of Houston underscores the intense appetite of growth-constrained European insurers for the U.S. market .

But negative reaction to the plan by Prudential shareholders has slashed the value of the deal and cast doubt on whether it will win approval from American General’s shareholders in its present form. But even if the deal doesn’t go through, it could spark a bidding war for other U.S. insurers by European companies.

The combination would create a trans-Atlantic financial services giant that would be the United States’ biggest seller of annuities, the second-biggest seller of life insurance policies and the No. 3 consumer lender, with combined assets under management of $336 billion.

Under the terms of the all-stock deal, American General shareholders would receive 3.66 Prudential shares, or 1.83 American depositary receipts, for each American General share. American General shareholders would also be paid an 87-cents-per-share dividend before the acquisition was completed.

When the proposed merger was announced last Monday, the stock swap was valued at $49.52 per American General share, or $26.5 billion, based on a 10-day trailing average closing price of Prudential’s stock.

However, worries by Prudential shareholders over the deal’s hefty price, a deteriorating U.S. economy and the likelihood that American General shareholders will sell off their Prudential stock and depress the price of Prudential’s U.K. shares pushed the British insurer’s stock down 16%, making the deal worth around $41.50 a share, or $22 billion.

That trimmed the original premium of 3.1 times American General’s $16.07-per-share book value to just 2.6 times, a level that American General shareholders are unlikely to approve.

“In the absence of material recovery in Pru’s share price, for this deal to get done, Pru will need to sweeten the pot,” says insurance analyst Colin Devine of Salomon Smith Barney Inc. in New York.

Indeed, French insurer Axa paid 3.1 times book value when it bought the outstanding shares of Axa Financial Inc. last year. And Hartford Financial Services Group paid 3.4 times book for the publicly traded shares of Hartford Life Insurance Co.

Still, analysts don’t expect another suitor to emerge with a counteroffer for American General that’s stronger, especially given the $600 million termination fee that would be due Prudential.

Rather, the deal could prompt a series of bids by European insurers for other U.S. life insurers such as Lincoln National Corp. of Philadelphia, John Hancock Financial Services Inc. of Boston or Jefferson-Pilot Corp. of Greensboro, N.C., says Eric Berg, an analyst with New York investment house Lehman Brothers Inc.

Hancock is protected by regulatory takeover restrictions through Jan. 27, 2002, as part of its conversion from a mutual, or policyholder-owned, structure last year.

Hancock CEO David D’Alessandro has said, however, that he is open to exploring a “merger of equals” with a larger financial services company.

Hancock, Lincoln and Jefferson-Pilot each have a market capitalization about half of American General’s, making them easier to “digest,” notes Salomon’s Mr. Devine.

Under the Pru-American General deal, the British company’s CEO, Jonathan Bloomer, would head the combined entity, whose headquarters would be in London.

Robert Devlin, chairman and chief executive of American General, is slated to join Prudential’s executive board as deputy chairman and head the companies’ North American operations, to be based in New York.

Robert Saltzman, president and chief executive of Jackson National Life Insurance Co., Prudential’s primary U.S. subsidiary, acquired in 1986, is to leave Jackson National upon the deal’s closing, expected in the third quarter.

out of the bidding

The deal takes both of the insurers out of the bidding for Liberty Financial Cos., the Boston mutual fund and annuity marketing company that parent Liberty Mutual Insurance Co. put up for sale in November.

American International Group Inc. of New York is believed to be the only potential bidder for Liberty Financial.

A combined Prudential and American General would lack a significant U.S. asset management platform, something both companies have been seeking on their own. Prudential’s search goes back to at least 1997, when talks fizzled with midtier mutual fund manager Strong Capital Management Inc. of Menomonee Falls, Wis.