British life assurance company Resolution has agreed an 8.6 billion-pound ($17.7 billion) all-share merger with rival Friends Provident that will almost double its size and open the closed life funds specialist to new business growth.
The two sides, which first announced talks on Monday, confirmed that Resolution shareholders would own 50.9 percent of the combined group, to be called Friends Financial, and Resolution also gets the top two management roles.
Shareholders in Friends will retain their shares in Friends, to be renamed Friends Financial, while Resolution investors will get 3.25 new Friends Financial shares for each Resolution share.
A merged group will become Britain's fourth-largest life insurer by market value, combining new business growth from Friends, which has been burning cash in recent quarters to fund its fast-paced growth, and Resolution's strong cash flow.
The merger of these companies creates a new and important force in the British life insurance market. It provides for investors the sweet spot of cash plus growth, Resolution's chairman, Clive Cowdery, said.
Some analysts questioned the value of the deal for Friends shareholders, who will be getting no premium reviving nagging market speculation of a possible counter-bid for the former mutual.
At Wednesday morning's prices Friends shares were trading at 197 pence -- 12 percent below the 225 pence the shares fetched in their 2001 IPO.
At the exchange terms announced on Wednesday, Friends investors would get no premium, but Resolution shareholders would get 3.25 shares -- worth 640 pence at Wednesday's prices to give a premium of more than 4 percent to the current share price.
This is a much better deal for Resolution than it is for Friends Provident, analyst Charles Graham at Evolution said in a note to clients, arguing the deal values Friends at just over 1.1 times its last published embedded value -- a hefty discount to the sector average of around 1.4 times.
If the appeal of this deal to Resolution is the opportunity it gives them to grow new business from Friends Provident's solid platform, it is paying a very low price for it.
Resolution's entrepreneurial founder Cowdery, who has virtually doubled the size of his group every year for the past three years, will become chairman in the new company, while his chief executive, Mike Biggs, will also remain in his position.
Friends Provident chief executive Philip Moore will become deputy chief executive.
(Friends) seem to have given away control without getting much of a premium, analyst Youssef Ziai at ABN AMRO said.
There has to be a chance that someone else will feel they can improve on the offer.
Moore said a counteroffer remains possible but said the value of the tie-up with Resolution would be hard to beat.
Private equity bidders like JC Flowers, industry giants like French giant AXA and Italy's Generali have all been named as possible buyers for Friends. But it is unclear whether any will step forward to battle Resolution.
A source close to the matter confirmed earlier this week that Flowers had looked at Friends but said that did not mean he would make a move: I'm not sure the numbers work.
AXA -- which has a 16 percent stake in Friends, according to its annual report, held largely via a subsidiary -- has declined to comment on its interest, but the group's UK head said last month he planned to grow without major acquisitions.
I think the only surprise on the upside will be the cost synergies. I think people were expecting there wasn't going to be any and this was more about revenue synergies and strategic fit, Peter Eliot at Man Securities said.
The two firms said the deal will generate at least 100 million pounds in annualized pretax cost savings and synergies by the end of 2010 and that it would boost earnings per share by 2009 for both sets of shareholders.
The two sides declined to comment on possible job losses, but said synergies would initially come from combining offices like the companies' two headquarters.
Resolution and Friends also plan to combine Resolution Asset Management (RAM) with F&C Asset Management, which is 51 percent owned by Friends Provident, on terms to be agreed with F&C. They expect F&C to remain separately listed.