Prudential Plc, Britain's largest insurer's $35.5 billion deal to acquire the Asian life-insurance arm of the American International Group, Inc. (AIG) is facing a potential collapse after the US-based insurer refused to lower the cost of the deal.

AIG, the stricken insurance and financial services firm, had signed a definitive agreement in early March 2010 with Prudential for the sale of its Asian assets, the AIA Group Limited (AIA) for $35.5 billion. (See: AIG sells Asian assets to Prudential for $35.5 billion)

But the deal ran into trouble with Prudential shareholders, who strongly opposed the cost, which even according to analysts, was steep for AIA.

Analysts had suggested that a lowered $30-billion offer could possibly see shareholders drop their opposition and go along with the transaction if AIG accepted the revised offer.

The French-speaking former minister in the government of Ivory Coast Tidjane Thiam, who has been appointed the chief executive of Prudential and is the architect of the deal, sent a revised offer over the weekend and dropped the deal price by $5.125 billion to $30.375 billion.

Prudential's revised offer consisted of $23 billion in cash, approximately 2.16 billion worth newly-issued shares of New Prudential with a value of $5.375 billion based on the theoretical ex-rights price for Prudential's ordinary shares of 171.31 and $2.0 billion in aggregate principal amount of perpetual tier one notes to be issued by Prudential.

But the New York City-based AIG, which received a $132-billion bailout from the US government during the height of the financial crisis, has refused to consider any downward revisions, despite several rounds of negotiations with Prudential.

AIG said in a statement, "After careful consideration, the company will adhere to the original terms of its previously announced agreement with Prudential PLC for Prudential to acquire AIG's wholly owned pan-Asian life insurance subsidiary AIA Group Limited. The company will not consider revisions to those terms."

Since AIG's statement reinforces that it would not sell AIA at a lowered price, the London-based Prudential may have to postpone its 7 June shareholders vote for passing the deal along with its proposed $21-billion rights offer to fund the deal.

Prudential said today in a statement, ''Following detailed discussions with AIG's management and advisers, Prudential had proposed a revision to the terms that would have reduced the value of the consideration for the acquisition of AIA by Prudential Group plc (''New Prudential'') to $30.375 billion.''

Prudential added that its board is considering its position and will make a further announcement when appropriate, although it did not mention that the 7 June shareholders meet has been cancelled or delayed, indicating that it may still try to negotiate with AIG.

Thiam is battling to save his job over the deal, after barely six months at the helm. Even if AIG agrees to a reduced offer, Prudential must get the support of 75 per cent of its investors for the takeover at 7 June meeting. Many analysts say that the hurdle to acquiring approval may prove too high in the backdrop of the current mood among investors.

Leading a revolt against the deal, Robin Geffen, chief investment officer of fund manager Neptune, says around 21 per cent of shareholders have decided to vote against it. He adds that support is increasing daily and the required 25 per cent plus one vote is not far off.

RiskMetrics, the influential shareholder adivisory group, which works with pension funds around the world, has already been urging shareholders to give the 'thumbs down' to the deal.

If the deal does falls through, Prudential will have to pay AIG a termination fee of $230.6 million.

The AIA Group, founded 160 years ago, is a leading pan-Asian life insurance organisation that traces its roots in the Asia Pacific region back more than 90 years.

Prudential operates in 13 Asian markets where it has more than 11 million life customers. Asia, which accounted for 44 per cent of Prudential's profits in 2008, is also seen as the engine of the group's future growth.