Aviva agrees £5bn takeover of Friends Life
Alistair Gray, David Oakley and Arash MassoudiAuthor alerts
The chief executive of Aviva has pledged to assimilate its takeover target Friends Life with “almost surgical precision” after the two FTSE 100 insurers agreed on the largest deal between UK companies in more than six years.
Leading institutional investors in both companies have signalled qualified support for the tie-up, which is set to result in hundreds of job losses as Aviva plans £225m of annual cost savings at the enlarged group within three years.
In a sign of the scale of the ambition of Mark Wilson, Aviva’s chief executive, people familiar with the matter said the insurer would eye an even larger transaction once the Friends Life acquisition had bedded down.
Based on Aviva’s share price on Tuesday, the all-stock bid values Friends Life – whose shareholders will own 26 per cent of the enlarged company – at 370p a share, or £5.2bn.
“The only concern is integration of technology and people, but that should not be insurmountable and is a problem that is faced by any company looking to merge,” said a fund manager at one of Friends Life’s largest ten shareholders.
Some bankers are predicting more deals in the sector as a series of regulatory changes put life assurers’ business models under pressure.
Friends Life’s prospects have been damaged by UK chancellor George Osborne’s pensions reforms, which have led to a sharp drop in sales of annuities – among the industry’s most lucrative products.
“The combined forces of Aviva and Friends will be better placed to tackle the problems in a shrinking market once buying an annuity becomes optional,” said a top 10 investor in Aviva.
The deal is set to net £220m for Clive Cowdery, founder of Friends Life, and his partners including John Tiner, the former Financial Services Authority chief. They hold a “value share” in the business, a private equity-style incentive structure.
Aviva is planning to cut more costs – totalling £1.8bn – than some analysts had expected.
However, Eamonn Flanagan, at Shore Capital, said he was disappointed about the timeframe to deliver them. He suggested the takeover may be a “camouflage for issues within [Aviva’s] own internal restructuring and turnround story”.
Integration costs are expected to total £350m, of which £200m will be incurred next year.
Aviva also said the acquisition would be “broadly neutral” to its operating earnings only “once full run-rate synergies are achieved”, which is not expected until the end of 2017.
Aviva to review external managers of Friends Life funds
Aviva will review management of Friends Life funds outsourced to Axa Investment Managers and Schroders when it takes over its fellow insurer, said Euan Munro, chief executive of Aviva’s asset management arm.
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Mr Wilson would not be drawn on the number of job cuts. “It’s inevitable that when you put two organisations together, there may be some reduction in headcount. But we are going to talk to our people first,” he said.
Asked what the bidder’s shareholders made of the acquisition, Mr Wilson said: “Some people say it’s too cheap, some people say it’s too expensive. So I figure we’ve got it about right.”
Shares in Aviva closed little changed at 500p. They were supported by the separate disclosure that the insurance group plans to pay a final dividend for 2014 of 12.25p a share – 30 per cent higher than a year ago.
Friends Life shares rallied 3.9 per cent to 380.51p. Under the terms unveiled on Tuesday, its shareholders will receive a full-year dividend of 31.15p a share – 10p more than they had been in line for – if the deal goes ahead.
Andy Briggs, Friends Life’s group chief executive, will become chief executive of Aviva’s enlarged UK life business and join the Aviva board. He said he was “excited” by the tie-up, which “brings together complementary strengths”.
Sir Malcolm Williamson, Friends Life’s chairman, will become senior independent director.
Both sets of shareholders need to approve the deal, the biggest in UK insurance since the merger of CGU and Norwich Union in 2000, which created Aviva.
The combined group will have 16m UK customers – equivalent to about one in four households – and £340bn of assets under management.
Aviva was advised by Morgan Stanley, JPMorgan Cazenove and Robey Warshaw while Friends Life was advised by Goldman Sachs, Barclays and RBC Capital Markets.