Analysts have expressed concern over the proposed merger between Aviva and Friends Life, stating legacy business and a lack of revenue synergies could drag on Aviva, while Friends Life may suffer job losses.
As FTAdviser reported this morning, Friends Life saw its share price increase by 5.81 per cent since Friday’s on the news that it is in talks with Aviva over a possible merger. However, Aviva’s share price fell by 3.9 per cent this morning, opening at 522p per share.
The Friday (21 November) statement confirmed that the two companies had reached “agreement on the key financial terms” of a buyout that could be worth £5.6bn, putting the merged entity amongst the largest life and pensions firms in the UK, with 16m customers, around 5m of which coming from Friends Life.
“A combination of Aviva and Friends Life would create the UK’s leading insurance, savings and asset management business by number of customers, with a stronger balance sheet and significantly higher cash flows, enhanced by substantial synergies, from which to accelerate dividend growth,” read the statement.
BNP Paribas research suggested that the deal could mean significant job losses at Friends Life and £100m of expense synergies.
“At the end of 2013, Friends Life employed 3,872 staff (including 325 or so at Lombard). We see very heavy job losses and synergies resulting from this proposed merger.
“Around one-third of Friends Life staff work on the UK life business, another third internationally, only 8 per cent support the outsourced businesses, leaving 25 per cent in the corporate centre and shared services.
“We expect the merger could cut Friends Life staff costs by 40 per cent, or £80m; the key question is how much impact can be made to the IT costs (£50m in 2013) and ongoing Solvency II costs.”
Analysts also noted that Aviva has only just stopped booking high restructuring charges following the legacy IT systems from mergers made 14 years ago.
“However, given our view of the challenges facing Aviva’s earnings sustainability and the current downside in Aviva’s valuation, the merger may seem logical.”
Other than asset management, BNP Paribas struggled to see any other revenue synergies.
“The idea of selling general insurance to Friends Life policyholders in a way Aviva have failed to do so to their own policyholders is puzzling,” read the analyst's note.
“Pensions administration quality has never been a strength at Aviva, hence many of Friends Life’s schemes may choose to change provider, as the combined group is unlikely to have as high administration standards.”
Aviva has offered 0.74 shares for each Friends Life share, with the offer assuming a price of 400 pence per share for Friends Life, a 15 per cent premium to the closing price at the end of last week.
Sheridan Admans, investment research manager at The Share Centre, stated that should the deal go through, analysts believe synergies would be substantial, with Aviva’s balance sheet benefiting along with its pensions and protection operations.
He warned that this is far from a done deal, however.
“Friends Life investors may push for a higher premium or other interested parties may show their hand, however the latter is assumed to be unlikely given the size of the deal and the implication that may pose.
“Due to the merger activity we are downgrading Aviva to a ‘hold’ recommendation while it goes through firming up the terms of its deal with Friends Life. We continue to have faith in Aviva’s recovery outlook and any share price weakness may prove a good entry point. We also recommend Friends Life as a ‘hold’ for investors during this process.”
Stephen Bailey, co-manager of the Liontrust Macro Equity Income Fund, stated that Friends Life will appeal to Aviva on a number of levels, not least due to its high free cash flow generation and exposure to a UK life market which has been given new impetus by this year’s Budget changes.
“Through this agreed all-share deal, Aviva should be able to achieve scale in the corporate pension market, an area in which Standard Life has so far been the standard bearer.
“The pensions reforms announced in the Budget were initially seen as unfavourable for the life industry, but investors are now coming round to the idea that necessary changes have been catalysed.”
He added: “The closed book life segment in particular looks ripe for consolidation with assets being valued more cheaply than they have for at least a decade and the incumbent banks – mindful of the need to manage their Tier 1 capital ratios – may be reluctant sellers of closed books.”
peter.walker@ft.com
