U.K. insurer Friends Provident Group PLC (FP.LN) Tuesday said it
has agreed to be acquired by restructuring firm Resolution Ltd.
(RSL.LN) in a GBP1.86 billion deal, effectively ending a
contentious takeover battle on the same day as it posted a 38% drop
in first-half pretax profit.
The deal is Resolution's first major acquisition in its bid to
acquire three insurers in the next two to three years. It was set
up to lead consolidation in the U.K. insurance sector, targeting
companies that its management thought weren't providing enough
value for shareholders. The deal hasn't been easy to achieve, with
Resolution forced to sweeten its offer after Friends rejected its
initial approaches.
Friends said Resolution will offer 0.9 new Resolution shares for
each Friends share. Resolution is also offering a cash option, with
up to GBP500 million available for Friends shareholders who would
rather cash out.
The deal, wrapped up after several weeks of negotiations, values
Friends at about GBP1.86 billion, or 13% higher than its market
capitalization at Friday's close of GBP1.64 billion. Friends'
shares closed at 70 pence a share Friday.
Resolution raised its share offer after its previous proposals -
first 0.8 shares and then 0.82 Resolution shares per Friends share
- were rejected by Friends.
"We are delighted to have reached agreement with the board of
Friends Provident. We are excited by the potential for our proposed
restructuring of the U.K. life assurance and asset management
sector and believe the acquisition of Friends Provident is an
excellent first step," Resolution Ltd. Chairman Mike Biggs
said.
Friends Chairman Adrian Montague said: "The board of Friends
Provident is pleased to have secured this attractive transaction
for shareholders. The transaction offers shareholders the choice of
an attractive premium on exit or the opportunity to be part of
Resolution's first financial services restructuring project."
The deal is expected to be completed around end-October, after
which Friends Provident will be delisted and the enlarged
Resolution Ltd. will be admitted into the FTSE 100, probably in
December. At 0946 GMT, Friends shares were up 2.4% at 77 pence,
while Resolution was down 3% at 86 pence.
Friends' first-half underlying profit on a European Embedded
Value basis was GBP131 million, down from GBP211 million in the
same period a year ago and below analysts' forecasts for GBP148
million.
The drop was due to a continued fall in its life and pensions
sales as the economic slowdown prompted customers to cut insurance
spending.
Its EEV net loss, which factors in the effects of falls in the
value of investments, widened to GBP67 million from GBP24
million.
On an IFRS basis, first-half net loss was GBP98 million, worse
than the GBP60 million net loss a year earlier.
Friends said that "the outlook for the remainder of 2009 remains
challenging given the uncertain pace of recovery in the U.K.
economy."
Analysts largely glossed over the earnings results, focusing
more on the next possible moves of Resolution.
The main points of the takeover deal have been expected as they
were already outlined on Monday by Friends Provident.
Oriel Securities analyst Marcus Barnard said Resolution's story
"will become much more interesting as they announce subsequent
deals and we are able to gauge what sort of value can be created
from cost and outsourcing synergies, asset management synergies and
disposals."
Barnard kept his buy rating on Resolution.
Shore Capital analyst Eamonn Flanagan noted that other
previously mentioned possible targets by Resolution include
Clerical Medical and Scottish Widows, which are both owned by
Lloyds Banking Group PLC (LYG).
Others mentioned in the past include Legal & General Group
PLC (LGEN.LN), Standard Life PLC (SL.LN), Old Mutual PLC (OML.LN)
and Aviva PLC(AV.LN) - all much larger than Friends, and a takeover
involving anyone of them would surely make Resolution Ltd. a major
player in the U.K. insurer sector.
Panmure Gordon's Barrie Cornes said Friends' results "highlight
the strategic challenges that Friends faces as a standalone
entity." Cornes said new business contribution in the U.K., down
80% at only GBP3 million, is "falling off the edge of a cliff."
Clive Cowdery, head of Resolution Operations, which manages
Resolution Ltd., told a briefing that Resolution Ltd. may be able
to buy more than three companies in the next two to three
years.
"Could that be more than three companies? Possible. The market
is still very fragmented today," Cowdery said.
"Three would give you that kind of blended cash flow and that
kind of new business optionality. There could be more, but I don't
think it will be less," he said.
Cowdery also said Resolution Ltd. should be able to get more
cash needed for its next purchases.
"We remain confident that there is substantial capital that can
be attracted into the restructuring of the life sector given its
attractive returns as we go into the next phase of the project," he
said.
www.friendsprovident.co.uk
www.resolution.gg
-By Vladimir Guevarra, Dow Jones Newswires, Tel. +44 (0)
2078429486, vladimir.guevarra@dowjones.com
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