Aviva, Friends Life 5.6 billion pound merger plan makes sense: investors

Sun Nov 23, 2014 2:43pm EST
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By Carolyn Cohn and Simon Jessop

LONDON (Reuters) - Aviva's potential 5.6 billion pound ($8.8 billion) purchase of Friends Life reflects a need to consolidate and cut costs in Britain's insurance industry, fund managers said.

The two companies said on Friday they had agreed terms of a possible all-share deal at a 15 percent premium to Friends Life's closing price, offering Friends Life shareholders a 26 percent stake in the new company.

The proposed transaction shows how insurers are having to rethink they way they do business after the British government changed rules covering annuities, which provide retirement income, causing a slide in annuity sales.

Some investors were surprised at the timing of the deal given both companies are in turnaround mode.

"Consolidation per se in UK life insurance is not a surprise and is necessary," said David Moss, head of European equities at F&C, which has Aviva shares, according to Thomson Reuters data. "The surprise is perhaps that both businesses are not where they would want to be yet and are in the middle of restructuring programs of their own."

Moss said the pricing did not look overly generous, but that the merger could provide benefits.

Max Anderl, fund manager at UBS Global Asset Management, said he had bought into Aviva after it cut its dividend several years ago, as he saw potential for the share price to grow as new management restructured the company.

"The restructuring story has played out very well under the experienced leadership of Mark Wilson. The plan seems to be to do it all again via a merger. Given there is little growth out there this seems a sensible strategy to me," he said.   Continued...

A man walks past an AVIVA logo outside the company's head office in the city of London March 5, 2009.    REUTERS/Stephen Hird