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Pru's Bid for AIG's Japanese Business is Scale Play

NEW YORK( TheStreet) -- Prudential Financial (PRU - Get Report)'s reported talks to acquire two American International Group (AIG - Get Report) Japanese life insurance companies could important scale to compete in the Asian market.

According to the Wall Street Journal, AIG Star Life Insurance Co. and AIG Edison Life Insurance could be sold to Prudential for $4 billion to $5 billion.

If Prudential does pick up these companies, it could transform its life insurance business in Japan, says John Nadel, managing director of Equity Research at Sterne Agee & Leach.

Nadel believes Prudential is strategically looking at the business to add cost saving and expand its scale. AIG Star Life Insurance and AIG Edison Life Insurance generate around $7 billion in annual premiums. An acquisition of AIG's two Japanese units would be similar to several other deals AIG has done in Japan, and also allow Prudential to cut back office costs by using their big book of business.

"Prudential Japan and Gibraltar generate about 40% of Prudential's earnings," Nadel said. "An acquisition would be largely a scale play."

Prudential has operated in Japan for around 25 years and started its business there organically. However, Prudential has also expanded in Japan through acquisitions. The company picked up Gibraltar Life in Japan in 2001, which was a reincarnation of Kyoei Life after bankruptcy. In addition, in 2009 Prudential purchased Yamato Life out of bankruptcy. An integration of the new units of Prudential would take several years, but in the long run it would be worth it, Nadel said.

"I have a lot of confidence in Pru's ability to price deals for shareholders and integrate these units," Nadel said. "They have a good history."

CEO Robert Benmoshe started talks with Prudential last year, but they fell apart, and AIG had said they planned to keep those units. Nadel believes AIG may have been focusing on selling its ALICO unit before these two businesses.

"These deals take a while to work out," Nadel said."A similar thing happened with the Metlife (MET)deal. Metlife was looking at ALICO in late 2008. At that time AIG was focused on selling multiple businesses"

Nadel adds that the price tag sounds about right. "AIG Star Life AIG Edison Life bring in about $600 million in earnings after tax, and 7 to 8 times earnings is reasonably consistent with what the life insurance sector is trading at," he said.

Share of Prudential were down 1.49%, or 86 cents, to $56.65 in morning trading. AIG share were down nearly 2%, to $35.85.

--Written by Maria Woehr in New York.

To contact the writer of this article, click here: Maria Woehr.

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