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AIG Confirms It Will Get Breakup Fee

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American International Group Inc. and Prudential P.L.C. have announced the formal termination of the AIA Group Ltd. purchase agreement.

Prudential, London (NYSE:PUK), announced Wednesday that it had withdrawn a $35.5 billion offer for AIA, a giant Asian life insurance unit of AIG, New York (NYSE).

Rating agencies, securities analysts had questioned the price of the deal, and Prudential tried unsuccessfully to reduce the total price to $30.4 billion, and to reduce the amount of cash to be paid to $23 billion, from $25 billion.

The original purchase agreement called for Prudential to pay AIG a 153 million pound breakup fee if it walked away from the deal. The breakup fee would have a value of about $230 million at current exchange rates.

In some cases, parties that break off deal talks try to avoid paying breakup fees.

In this case, Prudential and AIG have entered into a termination agreement that states that AIG will receive a 153 million pound breakup fee July 1, AIG says in a report filed today with the U.S. Securities and Exchange Commission.

“All rights and obligations under the share purchase agreement are terminated, except that confidentiality agreements among the parties and certain procedural provisions of the share purchase agreement remain in effect,” AIG says.

Standard & Poor’s Ratings Services, New York, says the breakup will have no effect on its ratings on AIG and Prudential.

But the British Prudential – which is not related to Prudential Financial Inc., Newark, N.J. (NYSE:PRU) – probably is spending a total of about 450 million pounds, or about $660 million, on the effort to acquire AIA, S&P estimates.

Those costs could put some pressure on Prudential cash flow, and “w e believe there are also uncertainties over the strategic and financial implications of the termination of the AIA acquisition agreement, including confirmation of the final cost of settlement of its foreign exchange hedges put in place for the transaction.

For AIG, the development represents a setback in the company’s efforts to reduce outstanding indebtedness to the Federal Reserve Bank of New York and get out from under the control of the U.S. Treasury Department, S&P says.

“Nonetheless, the sale termination is not affecting the ratings and outlook on AIG, as AIG still maintains a level of flexibility in selling AIA, and its overall credit risk characteristics so far remain unchanged,” S&P says.

S&SP has assigned an A plus long-term counterparty credit rating to Prudential P.L.C. and an A minus rating to AIG.