Prudential shares surge after rejection of Aviva overture

Shares Prudential Plc, the UK's second-biggest insurer, rose as much as 13 percent after the London-based company rejected an approach from larger competitor Aviva Plc that could have led to the industry's biggest takeover.

The stock yesterday rose £0.83 (US$1.46) to £7.55 at 9:15am on the London Stock Exchange. Aviva made an all-stock bid of £7.08 a share for Prudential, valuing the company at about £16.9 billion (US$29.7 billion), Aviva said in a statement yesterday.

"We are of the view that for Prudential's management to accept a bid it is going to have to be some 30 percent above the current price," Greig Paterson, an analyst at Keefe, Bruyette & Woods Ltd, said in a note on Sunday.

"This is because the company has a new, relatively young CEO who would not want to play second fiddle to anyone, unless the economics are very compelling," he said.

Aviva the combination would lead to cost savings of £320 million a year before tax and that Richard Harvey, Aviva's 55-year-old chief executive officer, would run the merged company.

The insurer said it would only go ahead with the offer with the backing of Prudential's board. Prudential, run by CEO Mark Tucker, 48, and Aviva will discuss the bid with investors this week, two people familiar with their plans said.

Aviva rose £0.255, or 3 percent, to £8.76 in London, valuing the company at £29.5 billion.

A merger with Aviva would create a company with a combined market capitalization of about US$63.2 billion, the third-highest among insurers in Europe, closing in on Munich-based Allianz AG and Paris-based Axa SA. Prudential would add operations in the US and Asia to Aviva's predominantly European activities. Aviva this month said it would consider takeovers in Europe, the US and Asia.

An Aviva takeover of Prudential "would make them by far the largest UK player and allow them to compete at a European level," said Colin Morton, who helps manage about US$1.8 billion, including Aviva and Prudential stock, at Rensburg Sheppards in Leeds, England. Other potential bidders may emerge, including Allianz and Axa, Europe's biggest insurers, he said.

Axa Christophe Dufraux declined to comment on the possibility of a bid for Prudential. Allianz spokeswoman Antje Weykopf referred to a statement from CEO Michael Diekmann last week that the company wasn't seeking any big acquisitions.

A Prudential merger with Aviva would be the largest insurance industry combination since at least 1998, surpassing American International Group Inc's US$22.5 billion purchase of American General Corp in 2001, according to data compiled by Bloomberg.

Travelers Group Inc already owned a brokerage and securities firm, as well as insurance operations, before it merged with Citicorp to form Citigroup Inc, the world's biggest financial company, in 1998.

Mergers insurers are picking up after three years of stock market gains replenished reserves. Allianz in September agreed to buy the shares of Italy's RAS Holding SpA that it didn't already own for 5.7 billion euros (US$6.9 billion). In November, Zurich-based Swiss Reinsurance Co agreed to pay at least US$6.8 billion for the reinsurance unit of General Electric Co.

"There may be consolidation across Europe," Aviva's Harvey said in an interview on March 2. "All I can say is that Aviva is very strongly placed to be a winner if there is."

AIG Axa may be mulling bids for Prudential, the Sunday Telegraph reported on Sunday, without citing anyone.

AIG Chris Winans said the company doesn't comment on "rumors of deals or possible deals."