Aviva is in talks to buy Friends Life in a £5.6bn takeover that marks the life assurance industry’s first major reaction to the pension reforms unveiled by chancellor George Osborne in the spring. The new company would start life with 16m customers and be the UK’s biggest insurance and savings business.
The all-share bid – announced after the stock market closed – would be pitched at 399p per Friends Life share, 15% above today’s closing price of 347p. Agreement between the two FTSE 100 firms is not yet final, but talks are advanced.
If it happens, the takeover will be the biggest in the industry since Aviva was formed a decade and a half ago from the merger of Norwich Union and CGU, which was itself the product of the combination of Commercial Union and General Accident.
Osborne abolished the requirement for pensioners to use their pension pot to buy an annuity, which provides a guaranteed regular income during retirement. That overhaul has prompted a sharp fall in the sale of annuities, a core part of Friends Life’s business, though chief executive Andy Briggs argued the group was well-placed to capitalise on individuals’ greater freedom to shop around for pension products.
But Clive Cowdery, who founded the company as Resolution Group in 2009, is understood to have been sceptical about such a go-it-alone strategy and preferred a sale on the right terms. Cowdery led the consolidation of Friends Provident, BUPA Life and Axa’s UK life pensions business that created Friends Life.
He left the board this year but his Resolution operation retained an influence via a so-called “value share,” essentially a founder’s share with enhanced rights. A spokeman for Resolution said: “The possible offer would bring Resolution’s UK Life Project to a successful conclusion.”
Aviva, seen for years as bureaucratic and lumbering, has been through a cost-cutting and restructuring programme in the past two years under chairman John McFarlane, soon to depart to Barclays, and chief executive Mark Wilson. The group sold its US life and annuity business last year for £1.7bn, as well as many other smaller overseas operations, to strengthen its balance sheet. Despite a steep cut in shareholders’ dividends, the overhaul has seen Aviva’s share price improve from 300p in March last year to 539p, giving the company the financial firepower to contemplate acquisitions again. After a takeover, Friends shareholders would own 26% of the enlarged Aviva group.
“The board of Aviva believes that the combination with Friends Life would deliver significantly higher cashflows enhanced by substantial synergies, principally through operating efficiencies in the combined back books and the removal of overlapping overheads,” said the company.
There will be no upfront gains for customers. Instead, the companies will argue that Friends Life’s 5 million policyholders and savers will benefit “from being part of a stronger and more diversified group with a wider product range”.
Friends Life outsources the management of most of its £100bn of assets but Aviva plans to bring operations in-house, thereby massively expanding its Aviva Investors operation. It also hopes to sell car, motor and health insurance to Friends customers.
Despite Aviva’s optimism about the opportunities a takeover would create, Ned Cazalet, a leading independent insurance analyst at Cazalet Consulting, was sceptical.
“Aviva is a company which had huge issues bolting Commercial Union and General Accident into its life and pensions business. And what are they in now? A protection market that is very bloody and an annuity market where sales are collapsing. With Friends, it strikes me as a case of ‘I’m a shareholder, get me out of here.’
“Both are up to their eyeballs in writing annuities, where new business is disappearing like a rat up a drainpipe. They are like two guys on a foggy night huddling together for comfort. If I was holding paper in this I’d be hoping for some cost synergies but there’s no obvious dynamic here. It’s a consolidation of two companies propping each other up, with neither having much get-up-and-go.”
