The markets have reacted badly to the announcement on Monday of Pru’s plans to take over AIA in a deal worth £23.5bn, £14bn of which it intends to raise through a rights issue.
Since last Monday 22 February, Pru’s share price has plunged 20 per cent from its one-month high of 612p to 487p at 8.45am today.
Meanwhile, Fitch Ratings has placed Prudential on negative watch as a result of its plan to acquire AIG’s Asian subsidiary, AIA.
Fitch says it is concerned about the risks in executing such a large transaction as well as Prudential’s reliance on significant profitable growth of the businesses that would be acquired.
The agency expects the new debt funding will lead to a reduction in Prudential’s interest coverage, at least in the short term, which might add to the pressure on its ratings.
AIA’s embedded value at November 30, 2009 was £13.3bn. Fitch says following an acquisition of £23.5bn, there would be a significant amount of goodwill on the balance sheet.
Associate director Clara Hughes says: “The strength of the newly-combined entity’s balance sheet would be heavily reliant on the value that Prudential could generate from combining the operations and from future insurance policy sales through AIA.
“Ultimately, this will be driven by Prudential’s ability to increase operational efficiency when integrating the two businesses, the pace of growth of GDP and of the insurance markets in which AIA operates, and the amount of competition the group would face.
“These factors are highly uncertain.”