Acquisition
October 26 2004 - 3:03AM
UK Regulatory
RNS Number:4636E
Friends Provident PLC
26 October 2004
26 October 2004 Embargoed until 7.00am
Friends Provident plc
Acquisition by Friends Provident plc (Friends Provident) of Lombard
International Assurance SA (Lombard)
Summary
* Friends Provident to acquire 100% of Lombard for upfront payment of
Euro265 million (#183 million): to be funded through issue of Friends Provident
shares to Lombard shareholders
* Further payments to be linked to Lombard's performance in 2004, 2005
and 2006
* Friends Provident becomes a leading player in international
cross-border life assurance
* Acquisition will accelerate growth and enhance margins
Information on Lombard
* The leading pan-European life specialist focusing on high net worth
individuals
* New business APE in 2003 of Euro133 million (#92 million)
* New business profits before tax in 2003 of Euro44 million (#30 million)
* Compound annual new business growth of 25% over the last 10 years
* 2003 new business margin of 33% and ROEV of 25%
* Total new business premiums to 30 September 2004 up 36% on same
period in 2003
Benefits for Friends Provident
* Increases pro forma 2003 new business APE by 21% to #521 million*
* Increases pro forma 2003 margin by 2.5% to 21%*
* Increases pro forma 2003 ROEV by around 1%*
* Expected to enhance 2005 earnings per share by high single digit
percentage**
Commenting on the acquisition, Keith Satchell, Chief Executive of Friends
Provident, said:
"The addition of Lombard to our existing international operations makes us a
leading player in international cross-border business and provides us with an
excellent opportunity to accelerate our growth and diversify our earnings
further. It builds on our objective of expanding our international business,
giving us access to first class distribution in a high growth segment of the
market.
Our new business sales, announced separately today for the first nine months of
2004, will be significantly enhanced by this acquisition once completed. "
Commenting on the acquisition, John Stone, Chairman of Lombard, said:
"We are delighted to be joining the Friends Provident Group. We believe the
backing of a strong parent will bring further opportunities to expand in a
dynamic and profitable market. I look forward to developing our business under
the Lombard brand as part of Friends Provident for the long-term benefit of our
customers and Friends Provident's shareholders."
Friends Provident also announced separately today growth of 3.5% in new business
sales for the nine months to 30 September 2004.
There will be a presentation today for analysts and shareholders at Cazenove's
offices at 20 Moorgate, London EC2 at 9.30am. The slide presentation will be
available from 10.30am on www.friendsprovident.co.uk/presentations.
An investor teleconference will take place at 3.30pm today (dial-in: 01296
317500, access code: C194449). There will be a replay facility available for
seven days (dial-in: 01296 618700, access code: 657007).
Enquiries:
Friends Provident 020 7760 3133 Lombard +352 3461 91 224
Nick Boakes John Stone
Di Skidmore
Cazenove 020 7588 2828 Merrill Lynch Matthew 020 7628 1000
Tim Wise Greenburgh
Conor Hillery Alex Smith
Bell Pottinger 020 7861 3232
Tim Grey
Notes
1. APE means annual premium equivalent basis, calculated as new regular
premiums plus 10% of single premiums.
2. ROEV means return on embedded value.
3. The pro forma achieved profit and embedded value figures disclosed in
this announcement which relate to Lombard are estimates based on a 8.75% risk
discount rate and a methodology and assumptions which are consistent throughout
the period with those Friends Provident expects to adopt for future reporting
purposes.
4. New business margin means new business profits before tax and solvency
margin divided by APE.
5. All amounts in sterling in this announcement are translated at a euro/
sterling exchange rate of 1.45 for illustrative purposes. Actual payments made
by Friends Provident to Lombard's shareholders will be in euros on the basis set
out in this announcement.
* On a consolidated pro forma 2003 basis.
** This statement is in respect of Friends Provident's expected achieved
operating earnings after tax for the year ending 31 December 2005. Nothing in
this statement should be construed as a profit forecast or be interpreted to
mean that the future earnings per share of Friends Provident will necessarily be
greater than the historic published earnings per share.
Cazenove & Co. Ltd (Cazenove) is acting for Friends Provident and no one else in
connection with the transaction and will not be responsible to any person other
than Friends Provident for providing the protections afforded to the customers
of Cazenove or for providing advice in relation to the transaction.
Merrill Lynch International (Merrill Lynch) is acting for Lombard and no one
else in connection with the transaction and will not be responsible to any
person other than Lombard for providing the protections afforded to the
customers of Merrill Lynch or for providing advice in relation to the
transaction.
26 October 2004 Embargoed until 7.00am
Friends Provident plc
Acquisition by Friends Provident of Lombard
Introduction
Friends Provident announces that it has entered into an agreement to acquire
Lombard, the Luxembourg-based life assurer, for an initial payment of Euro265
million (#183 million) and subsequent variable payments based on Lombard's
performance. The initial payment will be funded through the issue of new Friends
Provident shares to Lombard's shareholders.
Lombard is the leading pan-European life assurance company specialising in
wealth management services for high net worth individuals. The expansion of
Friends Provident's international cross-border operations in markets with
superior growth prospects and where attractive margins can be earned has been
among the group's key strategic objectives since its public listing in 2001.
Background on Lombard
Based in Luxembourg, Lombard sells unit-linked life assurance policies to high
net worth and ultra high net worth individuals across 11 European countries
through private banks, family offices and independent financial advisers.
Lombard has achieved compound annual new business growth of 25% over the last 10
years. In 2003, Lombard wrote new business APE of Euro133 million (#92 million). In
the nine months to 30 September 2004, total new business premiums were Euro727
million, an increase of 36% on the same period in 2003.
Lombard provides clients with tailored solutions for estate planning and wealth
management. The products provided by Lombard are unit-linked and predominantly
single premium. Lombard writes business at attractive margin levels that reflect
the high value added, bespoke nature of the services it provides to its clients.
Average premium levels for Lombard's products are Euro475,000 (#325,000).
Lombard's distribution strategy is based on providing services in partnership
with private banks, family offices and other independent financial advisers. It
has relationships with over 50 private banks, ranging from global players to
traditional smaller private banks. These relationships are spread broadly across
11 European countries. The business operates under the EU freedom of services
regime from its head office in Luxembourg.
In 2003, in partnership with its global private banking partners, Lombard
established a platform in Asia, targeting countries in the region with high
growth potential. It has also entered the Mexican market.
Client funds are managed on an open architecture basis, either through the
investment management arms of private banks or independent fund managers, as
selected by the client depending on the distributor through which the product is
sold.
Lombard's principal shareholders are three institutional investors and John
Stone, its Chairman, who founded the business in 1991.
Strategic and financial benefits for Friends Provident
The expansion of Friends Provident's international cross-border operations in
markets with superior growth prospects and where attractive margins can be
earned has been among the group's key strategic objectives since its public
listing in 2001. The acquisition of the Isle of Man-based life business of Royal
& SunAlliance International (RSAI) in 2002 was an important step in fulfilling
this objective.
The acquisition of Lombard will significantly expand Friends Provident's
international business, creating a leading player in international cross-border
life business. The transaction further diversifies the group's distribution,
improving the quality of its earnings and providing more attractive growth
prospects. The RSAI acquisition moved Friends Provident's international
operations into the high net worth segment of the market. The acquisition of
Lombard reinforces this position and extends Friends Provident's reach into the
ultra high net worth segment which is more resilient to cyclical stock market
movements.
Lombard is a high growth, high margin business focused on servicing one of the
fastest growing segments of the long-term savings market. Lombard's leading
position and powerful distribution franchise in this market in Europe positions
it strongly to take advantage of these long-term trends.
The tailored service Lombard offers is particularly well suited to ultra high
net worth clients who increasingly require a bespoke approach to the management
of their wealth. Lombard has built a strong reputation with high net worth
clients which is not seriously challenged by the larger life assurance players
which tend to focus on more standardised products better suited to the mass
retail customer base.
The principal benefits of the acquisition to Friends Provident are:
* Acceleration of new business growth. Lombard operates in a high
growth segment of the market - Europe has one of the largest concentrations of
high net worth individuals in the world. Lombard's impressive record is
underpinned by the strength of its distribution and its distinctive service
offering. On a pro forma 2003 basis alone, Friends Provident's new business APE
would increase by 21% to #521 million.
* Enhanced margins. In 2003, Lombard's new business margin was 33%,
reflecting the high value-added nature of the service it provides to its
clients. Friends Provident's pro forma 2003 margin would increase by 2.5% to
21.1%.
* Diversification of earnings. Building on the recent acquisition of F
&C, Friends Provident's earnings will be more balanced following the acquisition
of Lombard. The acquisition will expand Friends Provident's distribution,
providing access to new markets not currently accessed from the Isle of Man and
relationships with a wide range of European private banks and family offices. On
a pro forma 2003 basis, international cross-border new business sales would rise
from 16% to 31%, with the potential to increase further over time.
* Extension of existing international cross-border operations into a
higher net worth segment. Friends Provident has proven knowledge and expertise
in international cross-border life assurance through its RSAI business which is
one of the largest cross-border life operations and is firmly positioned in the
high net worth segment. The acquisition of Lombard will enable it to extend
these operations further into the ultra high net worth segment.
* Low capital requirement business. The type of business that Lombard
writes (predominantly single premium, with no financial guarantees) requires
comparatively lower capital backing. This is a benefit that is common to the F&C
and RSAI businesses acquired by Friends Provident.
* Enhanced earnings per share and ROEV. The transaction is expected to
enhance Friends Provident's achieved earnings per share by a high single digit
percentage in the first full year following completion (the year to 31 December
2005)**. The group's ROEV is also expected to increase, consistent with the
relatively higher new business component of Lombard's business. Lombard's ROEV
in 2003 was 25%. As a result of the acquisition, Friends Provident's pro forma
2003 ROEV would increase by approximately 1%*.
Consideration structure
The consideration structure comprises a fixed initial payment and subsequent
variable payments based on Lombard's performance ("earn-out payments"). The
structure is designed to achieve an aggregate payment which fairly reflects the
longer term performance of Lombard while providing an incentive for Lombard's
management team to continue the business's strong growth. Under a reasonable
range of performance scenarios, the implied multiple of achieved operating
profit after tax that Friends Provident would pay, in aggregate consideration,
is approximately 6x.
The initial payment is fixed at Euro265 million (#183 million), payable on
completion in Friends Provident shares. The earn-out payments will be paid in
respect of each of 2004, 2005 and 2006 (payable in the following April) and will
be dependent on Lombard achieving certain performance thresholds for both new
business profits and underlying embedded value. The earn-out payments will be
paid in cash or Friends Provident shares, at Friends Provident's option.
The payments to be made in respect of 2004 and 2005 will be capped at Euro90
million (#62 million) and Euro85 million (#59 million) respectively with any excess
combined with the final potential payment in respect of the 2006 year.
The earn-out payments will be split into an amount to be paid in respect of new
business profits and a separate amount to be paid in respect of embedded value.
The table below illustrates the schedule of payments to Lombard under two
scenarios: (i) average compound growth in new business profits of 25% over the
years 2004, 2005 and 2006 and (ii) average compound growth in new business
profits of 5% over the years 2004, 2005 and 2006. In both scenarios, it is
assumed that Lombard's embedded value increases to levels consistent with the
respective levels of new business profit growth and all other assumptions are
achieved in practice, based on Lombard's current reporting methodology.
New business profits CAGR (2003-2006) 5% 25%
Eurom #m Eurom #m
Initial payment 265 183 265 183
2004 earn-out payment 33 23 80 55
2005 earn-out payment 15 10 74 51
2006 earn-out payment 0 0 71 49
Total consideration 313 216 490 338
Payments in respect of performance levels different to those illustrated above,
will vary on a broadly proportionate basis.
The total payments to be made, including the initial payment, will in any
circumstance be capped at the lowest of:
(i) Euro600 million (#414 million);
(ii) 1.4 times 2006 year end embedded value; and
(iii) the aggregate of 2006 year end embedded value and 2.0 times
2006 new business profits after tax and solvency margin.
Accordingly, to achieve the maximum payment of Euro600 million (#414 million),
embedded value in 2006 will need to be at least Euro429 million (#296 million) (an
increase of 150% over 2003) and new business profits after tax and solvency
margin will need to be at least Euro85 million (#59 million) (an increase of 180%
over 2003).
All the earn-out payments will be calculated using a fixed set of economic
assumptions such that the consideration structure is dependent principally on
Lombard's operating performance.
Management and integration
Lombard will continue to be run by its current management team. John Stone will
remain as Chairman and David Steinegger will continue to be Chief Executive. In
addition, Friends Provident will put in place its own governance and operational
controls.
The business will continue to operate under the Lombard brand, reflecting its
strong recognition among its distribution partners and clients.
Recognising the importance of Lombard's people to its business and client
relationships, Lombard's key employees will continue to be incentivised through
the company's executive share incentive plan in order to ensure the business
maintains a talented team for its future growth and development.
There is only limited overlap between Lombard and Friends Provident's existing
international cross-border business and synergies from de-duplication and
additional revenues are expected to be modest.
Conditions
The transaction is conditional, inter alia, on the receipt of certain regulatory
approvals. Completion is expected to take place in January 2005, with the new
Friends Provident shares issued in respect of the initial payment at that time.
Enquiries:
Friends Provident 020 7760 3133 Lombard +352 3461 91 224
Nick Boakes John Stone
Di Skidmore
Cazenove 020 7588 2828 Merrill Lynch Matthew 020 7628 1000
Tim Wise Greenburgh Alex Smith
Conor Hillery
Bell Pottinger 020 7861 3232
Tim Grey
Notes
1. APE means annual premium equivalent basis, calculated as new regular
premiums plus 10% of single premiums.
2. ROEV means return on embedded value.
3. The pro forma achieved profit and embedded value figures disclosed in
this announcement which relate to Lombard are estimates based on a 8.75% risk
discount rate and a methodology and assumptions which are consistent throughout
the period with those Friends Provident expects to adopt for future reporting
purposes.
4. New business margin means new business profits before tax and solvency
margin divided by APE.
5. All amounts in sterling in this announcement are translated at a euro/
sterling exchange rate of 1.45 for illustrative purposes. Actual payments made
by Friends Provident to Lombard's shareholders will be in euros on the basis set
out in this announcement.
* On a consolidated pro forma 2003 basis.
** This statement is in respect of Friends Provident's expected achieved
operating earnings after tax for the year ending 31 December 2005. Nothing in
this statement should be construed as a profit forecast or be interpreted to
mean that the future earnings per share of Friends Provident will necessarily be
greater than the historic published earnings per share.
Cazenove & Co. Ltd (Cazenove) is acting for Friends Provident and no one else in
connection with the transaction and will not be responsible to any person other
than Friends Provident for providing the protections afforded to the customers
of Cazenove or for providing advice in relation to the transaction.
Merrill Lynch International (Merrill Lynch) is acting for Lombard and no one
else in connection with the transaction and will not be responsible to any
person other than Lombard for providing the protections afforded to the
customers of Merrill Lynch or for providing advice in relation to the
transaction.
Appendix
Lombard financial information
In 2003, Lombard reported total new business premiums of Euro1,111 million, up 20%
(2002: Euro928 million) and new business APE of Euro133 million, up 21% (2002: Euro110
million). The contribution before tax and solvency margin to profits from new
business written in 2003 was Euro43.8 million, up 4% (2002: Euro42.0 million) on a
margin of 33% (2002: 38%). The contribution after tax and solvency margin to
profits from new business written in 2003 was Euro29.6 million (2002: Euro28.4
million). Lombard's embedded value as at 31 December 2003 was Euro172 million
(2002: Euro137 million).
For the nine months to 30 September 2004, Lombard wrote total new business
premiums of Euro727 million compared to Euro536 million in the same period in 2003.
This information is provided by RNS
The company news service from the London Stock Exchange
END
ACQUVRORSSRRUUA