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Prudential PLC's (PRU.LN) plans for a massive Asian acquisition and rights issue were criticized again, as an influential shareholder proxy advisory service raised its voice against the deal.
RiskMetrics recommended shareholders vote against Prudential $35.5 billion takeover of AIA Group Ltd., the Asian business unit of heavily indebted American International Group Inc. (AIG). RiskMetrics cites a high cost of capital, challenging profit targets for AIA that could be difficult to deliver and integration risk for its recommendations.
Its stance is the latest challenge for the deal that has reportedly failed to win the backing of some of Prudential's major shareholders due to the large size of the rights issue being used to fund it, and which was nearly derailed by the U.K.'s financial services regulator's concerns over capital reserves.
RiskMetrics said in a report that while the strategic rationale behind the deal was sound, Prudential was paying a high price for a risky deal.
"While the deal's valuation might be fair in terms of deal and trading multiples, it doesn't necessarily follow that the deal makes sense for Pru," RiskMetrics said. It highlights that to deliver return on invested capital, AIA's operating profits would need to grow at very high rates which can't be counted upon.
"We believe that a full price, integration risk and ambitious targets to barely meet what we believe is a reasonable cost of capital do not make a compelling combination. As such, we recommend shareholders vote against the deal."
Prudential said in a statement it disagreed with RiskMetrics' assessment.
"We believe our profit targets are robust and achievable within the forecast horizon of 2013," a spokesman said.
"We believe the combination of Prudential and AIA represents a compelling combination that will deliver very attractive returns to our shareholders."
Prudential on Tuesday listed some of its U.K. shares in Hong Kong in Singapore, a key step towards a larger GBP14.5 billion rights issue associated with the deal. Existing shareholders will have the rights to buy 11 new shares for every two they now own. The rights issue was delayed after the U.K. Financial Services Authority, which regulates U.K. financial companies, earlier expressed its concern about the capital reserves of the combined groups.
Shareholders must vote on the transaction at a June 7 shareholder meeting.
Prudential management has recently claimed that the majority of shareholders back the deal, based on the logic of gaining access to fast-growing Asian markets.
But the Capital Group Cos. Inc. (CAP), Prudential's largest shareholder, has been reported to be opposed to the deal. It hasn't commented.
Many analysts have said that the integration of the two companies will be challenging. Earlier this week, it was reported that AIA Chief Executive Officer Mark Wilson was planning to step down if the takeover went through. Prudential said it hasn't had any indication that Wilson plans to leave the company.
At 1040 GMT, Prudential shares were up 4 pence, or 0.9%, to 516 pence in a higher overall market.
-By Jessica Hodgson; Dow Jones Newswires; +44207 8429373; firstname.lastname@example.org.