Aviva and Friends Life have proposed a £5.6 billion deal that would create the UK’s largest life insurer with a combined market capitalisation of £20 billion. The two rival insurers announced the proposed merger on 21 November, following a leak that forced Aviva and Friends Life to issue a statement before investors had been briefed about the deal.
This surprise announcement has received a less than friendly reception in the City. Aviva’s shares have fallen 5 per cent since reports of the all-share deal, while Friends Life’s shares have risen by 5 per cent. Many analysts are confused about the deal’s contradiction with Aviva’s plans to expand abroad. Moreover, the UK life insurance market has become exhausted, leaving little potential for growth. This mature market is a result of the UK’s ageing population and low interest rates, which have adversely affected the appeal of life and pension products.
The possible merger is particularly confusing in light of the pension market reforms announced by George Osborne. These dramatic reforms ended the compulsory purchase of annuities (products which provide an income in retirement). As pensioners have been awarded greater freedom to invest their pension pots elsewhere, sales of one of life insurer’s most lucrative products have dropped sharply. Annuities are Friends Life’s specialty, so why is Aviva getting involved now? The appeal of Friends Life is its low debt levels and strong cash flow. A statement issued by Friends Life declared ‘the transaction would… more than double Aviva’s corporate pension assets under administration and create new opportunities’ for customers to shop around for a wider portfolio of pension products.
BNP Paribas reports the merger would result in more than £100 million worth of cost savings. However, this comes at the cost of job cuts. Aviva employs 2,000 staff at its York Head office, 1,500 in Sheffield, and an additional 1,500 nationally. Analysts have predicted that 2,000 jobs could be at stake across the combined group, which would save an estimated £80 million in costs.
Under Takeover Panel rules, Aviva’s deadline to make a final offer is 19 December. If Aviva does not make this offer, it has to withdraw from further discussions for six months.
Aviva Financial Advisers: JP Morgan, Morgan Stanley and Robey Warshaw.
Aviva Legal Adviser: Allen & Overy.
Friends Life Financial Advisers: Goldman Sachs, Barclays and Royal Bank of Canada.
Friends Life Legal Adviser: Linklaters.