Insurer Pearl made a 4.9 billion pound ($10.1 billion) cash offer for rival Resolution on Friday, in a dramatic move aimed at thwarting a deal between Resolution and Standard Life agreed just hours earlier.
Britain's Pearl Group, run by entrepreneur Hugh Osmond, a long-time rival of Resolution Chairman Clive Cowdery, also strengthened its position by increasing its stake in Resolution to 24.2 percent.
Pearl, which has had two previous bid proposals rejected by the Resolution board, said it was now offering 720 pence a share in cash, up 4.2 percent from its last proposal.
This compares with a cash-and-shares bid from Standard Life that was worth 715 pence a share at Thursday's closing prices, which was endorsed by Resolution's board earlier on Friday.
Resolution shares, however, climbed as much as 3 percent to 730 pence on speculation the battle had further to run.
We haven't seen the end of this, said Pali International analyst Marcus Barnard. Standard Life has got to improve the offer. I'm surprised they low-balled it in the first place.
Oriel Securities analyst Roman Cizdyn said it was tough to see which way the battle would go, but Pearl's stake and the fact its bid was all cash gave it the upper hand.
We're right in the middle of it. I always thought that Osmond could go higher -- higher still than now. And Standard Life probably can go higher as well, he said.
Resolution, which specializes in life insurance funds closed to new business, has been targeted by suitors since it announced an 8.7 billion-pound merger with Friends Provident in July that was criticized by some shareholders, including Pearl.
That merger deal formally collapsed on Friday, when Resolution gave its backing to the Standard Life deal.
A source close to the matter told Reuters that Resolution's board would consider Pearl's raised bid over the weekend and meet with Osmond's team over the coming days.
Standard Life declined to comment on Pearl's new bid.
Earlier, Standard Life won Resolution's support with an offer of 517 pence in cash and 0.715 new shares for each Resolution share. That offer was worth 715 pence a share based Thursday's closing prices.
Standard Life's shares fell as much as 4 percent after the deal was announced, on concerns that the 1.3 billion pounds of shares it planned to issue would dilute earnings. But the stock bounced back to trade over 4 percent higher after Pearl raised its bid, on speculation Standard Life's offer would fail.
Ironically, that pushed the value of Standard Life's cash-and-shares bid above Pearl's -- to about 722 pence a share.
Standard Life said it had struck a side deal with Swiss Re under which it would sell the reinsurance giant some Resolution assets, mostly closed funds, for 2.35 billion pounds.
Buying Resolution would transform Standard Life into one of the UK's leading life and pensions companies with about 7 million UK customers, and create an asset management business with about 191 billion pounds of funds under management.
Standard Life also said it expected to make annual pretax cost savings of at least 53 million pounds by 2010 and financial savings of 18 million pounds before tax.
It said Resolution's Cowdery had been invited to become Standard Life's non-executive deputy chairman.
Separately, Friends Provident said it was confident of its independent prospects and that it would get a break fee of about 49 million pounds.
At 8:45 a.m. EDT, Resolution shares were up 2 percent at 724 pence. Standard Life was up 4.2 percent at 287.75 pence, Swiss Re was up 2.5 percent at 107.2 Swiss francs and Friends Provident up 0.3 percent at 176 pence.
(Additional reporting by Mark Potter and Miyoung Kim)