By David Wighton and Ian Walker
Investors gave a cautious welcome to the final terms of an
agreed GBP5.6 billion ($8.8 billion) acquisition by Aviva PLC for
Friends Life Group Ltd. that would create the U.K.'s largest
insurance, savings and asset-management company.
Aviva, which initially announced the deal last month after a
leak, said Tuesday the acquisition would consolidate its position
in the U.K., result in approximately GBP225 million of annual cost
synergies by the end of 2017 and higher dividends. However, the
company expects to book one-off integration costs of GBP350 million
by mid-2017 to achieve the synergies.
The cost-savings would be achieved by integrating operations,
recapturing previously outsourced asset-management contracts and
reducing corporate costs across the two businesses.
Shares in Aviva rose 1% to 505 pence by afternoon trading in
London, but were still 6% below their price at the time of the
preliminary announcement in November. Under the deal, Friends Life
shareholders will get 0.74 new Aviva shares for every share they
hold, valuing the shares at 397 pence, including a second interim
dividend of 24.1 pence. Friends Life shares rose 3.3% to 378
pence.
Some analysts expressed surprise at Aviva's plan to increase its
exposure to the mature U.K. life insurance market, which they said
was at odds with the strategy outlined by Mark Wilson since he took
over as chief executive in January 2013.
Mr. Wilson, however, said "... this transaction is absolutely
consistent with our investment thesis of cash flow plus growth. It
accelerates the strategies of both groups." He said the deal would
increase cash flow by GBP600 million a year and reduce leverage
allowing the combined group to step up investment in growth
markets, including life insurance in Turkey, Poland, South East
Asia and China.
Aviva plans to move GBP70 billion of the GBP100 billion of
assets in Friends Life funds, which are currently managed on an
outsourced basis, to Aviva Investors, increasing its assets under
management by 29% and boosting earnings by GBP40 million.
Mr. Wilson, said the deal, which had been under consideration
since June, would also deliver revenue and capital synergies but
that the companies weren't yet in a position to quantify them.
The deal, whereby Friends Life shareholders will get 0.74 new
Aviva shares for every share they hold, will dilute earnings in the
short-term but Aviva said it would be "broadly neutral" for its
operating earnings per share once full cost-savings were achieved
by the end of 2017.
At a briefing for analysts, Andrew Crean, of Autonomous
Research, said the cost synergies looked "relatively unambitious"
as a proportion of the combined cost bases. Mr. Wilson replied that
they represented 23% of the "addressable" cost base and were "well
within our gift to achieve."
About 60% of the estimated cost savings will come from the U.K.
life insurance operations. Mr. Wilson agreed that some of Aviva's
past acquisitions in life insurance have proved disappointing.
"Historically, there have been some issues and the synergies have
proved elusive." But he said that Aviva's recent record on costs
had been strong. "Both companies have a recent track record of
success in getting the costs out."
Mr. Wilson said that while Aviva had previously viewed its U.K.
life insurance business as a cash generator, there would be "more
of a balance between cash flow and growth" after the deal is
completed. The U.K. market is going through a period of turmoil due
to regulatory changes including government reforms to pension
savings.
Clive Cowdery, founder of Friends Life, and a group of other
senior executives will receive GBP220 million for settlement of the
Value Share, an incentive deal which pays out in the event that the
company is sold.
The combined group, of which Friends Life shareholders will own
26%, would have a market capitalization of GBP19.88 billion based
on the companies' closing share prices on Monday.
Upon completion of the acquisition, Friends Life Chief Executive
Andy Briggs will become chief executive of Aviva UK Life and join
the Aviva PLC board, while Friends Life Chairman Malcolm Williamson
will join Aviva's board as senior independent director. Aviva said
it expects more of Friends Life's nonexecutive directors to join
the enlarged board.
Write to David Wighton at david.wighton@wsj.com and Ian Walker
at ian.walker@wsj.com
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