Aviva and Friends Life agree terms for £5.6bn deal

Aviva has agreed the terms of its £5.6bn takeover of rival insurer Friends Life, a fortnight after deal talks were first revealed.

The companies have announced that Friends Life shareholders will own 26pc of the combined company if the deal is given the nod by shareholders.

This will mean Friends investors will receive 0.74 new Aviva shares for every share they own. The deal is worth 394p-a-share, a 15pc premium to the company's share price on 20 November, before the deal became public.

The combined insurer powerhouse will have approximately £309bn of assets under management - around 29pc more than Aviva Investors' looks after at present.

Aviva will also become the biggest player in the UK life market with around 12 million UK Life customers and assets of £215bn under management.

Sir Malcolm Williamson, chairman of Friends Life, said: "The board is pleased to recommend the offer which strongly supports our focus on generating value for shareholders."

Andy Briggs, the current group chief executive of Friends Life, will become the chief executive of Aviva UK and will join Aviva's board as an executive director. Sir Malcolm will become a senior independent director at Aviva and another non-executive director of Friends Life is also expected to join Aviva's board.

John McFarlane, chairman of Aviva, said: "Aviva's recent success and sound growth and return prospects already present a compelling investment proposition and enable us to advance our strategy through acquisition as well as organic growth.

"The proposed acquisition not only consolidates Aviva's leading position which Aviva has established in the UK, it is expected to enable a much stronger dividend flow and balance sheet position than would otherwise have been possible. It also offers Friends Life shareholders an attractive outcome."

Mark Wilson, who will continue as chief executive of the enlarged Aviva Group, said that there would likely be job losses as a result of the deal but would not give an estimate.

The companies said that they expect to generate £225m of cost synergies by 2017 and a "combined central liquidity position" of £2.4bn. In addition the newly-merged company aid that it expects to generate £600m of excess cash a year.

Mr Wilson told analysts on Tuesday morning that the blockbuster deal was not about "becoming number one or the biggest, I couldn't care less...but because every successful firm has a pre-eminent position in its home market."

"This deal will not be a distraction but a catalysts for our next phase of transformation", Mr Wilson said.

Aviva announced that Friends Life shareholders will also receive the insurer's proposed second interim dividend of 24.1p-a-share instead of its final dividend, resulting in a 2014 full year dividend of 31.15p-a-share. Separately, Aviva said that it will increase its final dividend by 30pc to 12.2p, resulting in a full year dividend of 18.1p-a-share.

Mr Briggs said: "Friends Life has always been about maximising value for shareholders and delivering strongly for customers. The compelling combination of Friends Life and Aviva provides an excellent opportunity to accelerate our existing strategy and growth, generating value for shareholders faster."

Analysts at Shore Capital said that the dividends and cost savings were positive but they were disappointed by the timescale estimated to deliver the savings.

Eamonn Flanagan at Shore said: "Overall, the above does not change our view on the deal. We view it as a rights issue in disguise which does little for the strategic positioning of Aviva, We remain puzzled why Aviva felt the need to do it now. Is it a camouflage for issues within its own internal restructuring and turnaround story?"