Aviva, Friends Life Agree to Deal -- 3rd Update

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 [e-mail] and Ian Walker at [e-mail]

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