British insurer Prudential said today it agreed to buy American General Corp in the biggest insurance takeover ever. But investors took fright at the $26.5 billion price tag and sent the Pru's shares sharply lower.
Analysts said it was overpaying for American General in the all-share deal to create the world's sixth-largest insurer and questioned its timing when the US economy seemed headed for recession.
Prudential shares plummeted 114p or 13 per cent in morning trade in London to 783p.
"The price is ludicrious for assets that are not yet clear. They are paying three times book value which even for a 15-20 per cent return on equity is pretty generous," said one fund manager.
Prudential, mainly a life insurer that has been expanding steadily in Asia, said the deal would significantly boost its presence in the United States - the world's biggest market for life insurance and retirement services.
Both parties appeared to be looking for a way to deal with tough market conditions in the United States.
"I think both companies had been slightly struggling last year because of the market," said Ms Jenny Campbell at fund management firm Gerrard.
Under the deal Prudential would end up owning 50.5 per cent of the merged group which would have a market value, based on their respective capitalisations, of $45.3 billion. Together they would have funds under management of $336 billion.
The two companies said they expected to complete the deal subject to shareholder and regulatory approval by the third quarter.
American General has agreed to pay Prudential a $600 million break fee if the deal is terminated due to a rival bid.