Friends Provident rejected a takeover proposal from Clive Cowdery's Resolution Ltd, saying the entrepreneur's terms were inadequate, his company was opaque and a tie-up would hobble the life insurer's management.
However a sharp rise in Friends Provident Group Plc shares on Monday pointed to investor expectations of a sweetened offer and some analysts hailed what could be the first step in a long-awaited consolidation of the sector.
Friends Provident said Cowdery's Resolution, based on the island of Guernsey, had proposed an all-stock deal consisting of 0.8 new Resolution shares for every Friends share.
That would value Friends at about 1.69 billion pounds ($2.7 billion), based on Resolution's Friday closing price of 90-1/4p.
But the target said this was wholly inadequate to compensate its 750,000 shareholders for a very different type of investment which would be created if the two groups combined.
It said the proposed set-up's complexity would hinder Friends Provident management strategically and operationally and would offer shareholders less transparency.
We are open-minded about the benefits of industry consolidation, but at this stage, the pace, direction and value of your consolidation strategy is speculative and uncertain, Friends Chairman Adrian Montague wrote in a letter to Resolution published on Monday.
The proposed deal would leave Friends shareholders with about 74 percent of the combined group.
In an earlier statement, Resolution said it had got constructive feedback from Friends Provident and the target's advisers and was mulling its next move.
Resolution said any offer was likely to be primarily in shares but boosted by some cash from the 600 million pounds it raised in a December stock market listing.
Shares in Friends were up 10.3 percent at 66.6p by 1110 GMT, valuing it at about 1.5 billion pounds. Resolution slipped 2.0 percent to 88-1/4p.
Shore Capital analyst Eamonn Flanagan said Resolution would need to offer about 79p a share -- equivalent to Friends Provident's net asset value (NAV) -- to entice shareholders, or could succeed with an offer in the low 70s if it included a big cash component.
They will have to narrow the gap materially, Flanagan said. But he said a decent overlap in the duo's shareholder base would aid Resolution's cause.
Panmure Gordon analyst Barrie Cornes, who has a 75p target price on the stock, said Friends Provident's UK-focused business faced a difficult trading outlook and shareholders were likely to welcome a revised offer from Resolution.
One top-10 Resolution shareholder offered his support. I am very sure this is not the end of it, he said.
We are shareholders in Resolution because we made a lot of money out of them last time around and as shareholders we are prepared to back them again to have another go at consolidating the industry.
Analysts had been expecting Resolution to pursue its first deal since the Financial Services Authority, Britain's financial regulator, closed an investigation into the vehicle in May.
But Flanagan at Shore Capital said he was surprised Resolution had targeted Friends Provident, which already runs a very lean operation, arguing sector rivals such as Aviva Plc or unlisted groups such as Lloyds Banking Group Plc unit Scottish Widows, could make better targets.
This is the second time that Cowdery has led an attempt to merge with Friends Provident. His previous venture, also called Resolution, agreed a tie-up with Friends in July 2007, but later broke off the deal and sold itself to Pearl Group, a privately held life insurer led by entrepreneur Hugh Osmond.
Credit Suisse is advising Resolution. Goldman Sachs and JPMorgan Cazenove are advising Friends Provident.
(Additional reporting by Raji Menon and Victoria Howley; Editing by Mike Nesbit and David Holmes)