By David Wighton and Ian Walker
Investors gave a cautious welcome to the final terms of a GBP5.6
billion ($8.8 billion) deal in which Aviva PLC would acquire
Friends Life Group Ltd., creating the U.K.'s largest insurance,
savings and asset-management company.
Aviva, which announced the deal last month, said Tuesday the
acquisition would consolidate its position in the U.K., result in
approximately GBP225 million of annual savings by the end of 2017
and permit it to increase dividends. The company expects the cost
of realizing the savings to total GBP350 million by mid-2017.
The savings would be achieved by integrating operations,
managing more of the combined group's assets in house, and reducing
corporate costs across the two businesses.
Shares in Aviva closed unchanged at 500 pence ($7.86) in London,
more than 7% 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 GBP3.84, including a final dividend of 14.1 pence.
Aviva also sweetened the terms for Friends Life shareholders by
promising an additional dividend of 10 pence if the deal goes
ahead, bringing the total dividend to 24.1 pence. Friends Life
shares rose 9 pence to GBP3.85.
Some analysts expressed surprise at Aviva's plan to increase its
exposure to the mature U.K. life-insurance market. They said the
move 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 debt,
allowing the combined group to step up investment in growth
markets, including life insurance in Turkey, Poland, South East
Asia and China.
Aviva will pay a final dividend of 12.25 pence a share to
existing shareholders, increasing dividends for the year by 30%. It
said that as a result of the deal, future dividend growth would
accelerate, and that it aims to have operating earnings of double
its dividends in the medium term.
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 benefits in terms of revenue and
capital but that the companies weren't yet in a position to
quantify them.
The deal will dilute Aviva's per-share operating earnings in the
short term, but Aviva said it would be broadly neutral once the
full 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," he said, 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," he said.
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 that 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 a 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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