Britain's Resolution and Friends Provident are in advanced merger talks to create a group worth almost 9 billion pounds, the two insurers said on Monday, rekindling hopes of consolidation across the sector.
After months of market speculation over possible mergers among UK life insurers, confirmation of talks between the two smallest blue chip players boosted shares across the board on Monday, with Friends trading up over 7 percent.
Monday's statement had no details on the terms of the deal or on a possible management split, but said Resolution, with the slightly higher market value, would own 50.9 percent. Resolution is also expected to secure the top two management positions.
It's a good deal for both sides. Friends has growth, and Resolution has the cash -- and the market has discounted each of the shares, because it doesn't have what the other one has, Peter Eliot at Man Securities said.
A merged group would combine Friends' new business growth and Resolution's cash flow and would have a value of around 8.7 billion pounds ($17.9 billion) at current market prices, making it Britain's fourth-largest life insurer.
Resolution has seen dramatic growth through consolidating closed life funds, which no longer write new business. Since buying bank Abbey's life unit in 2006, however, it has also shown an interest in active life businesses, especially as the price of acquisitions in the closed sector rises.
Friends has turned in one of the sector's fastest rates of growth in new growing businesses in the past year but is burning cash to fund that growth -- in particular to seal a share of Britain's growing group pensions market.
The cash outflow would normally have been offset by the group's cash-generative income protection business, but that has been hit by a market slowdown.
Friends has frequently been the object of takeover rumors, with private equity bidders and French giant AXA named as possible suitors. Monday's statement could flush out other bidders for Britain's smallest blue chip life insurer.
TAKING A GAMBLE
A merger with Friends would be the biggest gamble yet for Resolution's entrepreneurial chairman and founder, Clive Cowdery. Analysts said Resolution's lukewarm trading on Monday -- up just 1 percent -- indicated some nagging concerns.
It could destroy market credibility in Resolution's strategy, analyst Tim Young at Collins Stewart said.
I did see a similar situation occur with Legal & General after it bid for NatWest in the mid-90s. That bid fell over, and the market never really regained its faith in David Prosser's ability to manage the strategy of that company.
If agreed, the merger would involve an all-share combination. Resolution shareholders would own 50.9 percent of the combined group, and Friends Provident shareholders would own 49.1 percent, the two sides said on Monday.
Sources familiar with the matter had told Reuters on Saturday that the two sides were in merger talks.
The insurers aim to hammer out the outline of a deal in the next fortnight, in time for Friends Provident's interim results on August 8, the sources said over the weekend.
Monday's statement did not include details on the value of the deal or on a possible split of top management jobs.
Cowdery is expected to take that top job in any combined group, and sources close to the matter have indicated that Resolution's Mike Biggs could become chief executive of the merged insurer, with Friends Chief Executive Philip Moore becoming deputy chief executive.
Both Biggs and Moore are former finance directors who have only taken the helm this year.
Shares in Friends were trading up 7.4 percent at 0942 GMT, changing hands at 200.25 pence. Resolution shares were up 1.1 percent, trading at 636 pence.
Elsewhere in the sector, shares in Legal & General, which is expected to announce a special dividend or buyback later this week, jumped around 7 percent in early trade and were up 3.9 percent by mid-morning. Prudential, frequently named as a possible takeover target after it was approached by rival Aviva
last year, was up 2.1 percent.
(Additional reporting by Simon Challis)