■ Possible tie-up with a Swiss Re business
■ Hefty dividend in prospect
■ Debt levels falling
Closed life assurance run-off specialist Phoenix Group (PHNX) has confirmed that it's in preliminary discussions with Swiss Re's Admin Re business unit that could lead to the two combining. If successful - and Phoenix has stressed that there's no certainty of the talks leading to a deal - this would leave Swiss Re with a minority shareholding in Phoenix.
The move comes as Phoenix is beginning to emerge from a complex restructuring and refinancing package to reduce debt - which would free the group from restrictive covenants that limited its ability to increase the dividend payout. In fact, it can pay out £125m in dividends this year, which could be worth 55.8p a share - meaning a tasty 7.8 per cent yield.
Moreover, a trading statement in May also confirmed that business levels had been strong in the first quarter of the year - notably, cash generation had reached £410m in the three months to the end of March. However, cash generation is expected to be less in the second quarter, depending on the level of free surplus within the life companies. Debt was reduced by £450m, too, and the surplus over and above the group's minimum regulatory capital requirements fell by just £200m in the quarter to £1.2bn.
Deutsche Bank says...
Buy. The potential tie-up between Phoenix and Swiss Re is not too surprising as Swiss Re has been talking about selling this division for a while and Phoenix has been looking to get back on the acquisition trail. We believe discussions will centre on some kind of nil-premium merger, given that both operations have similar embedded value. A deal like this could be transformative for Phoenix, if it ends up lowering the group's debt ratio and allowing greater cash flow for dividends. Based on synergies equivalent to 10 per cent of the combined embedded value, debt leverage could fall from around 50 per cent to 33 per cent. Moreover, our price target stands at 775p and we expect adjusted EPS of 40.3p for 2013.
Canaccord Genuity says...
Buy. We have calculated different scenarios on how possible synergies would be distributed between Phoenix and Swiss Re. At the lower end for Phoenix, Swiss Re would receive a higher proportion of these in return for swapping Admin Re on a discounted embedded value, while at the higher end synergies would be evenly split. At the most conservative end, we calculate that this would equate to a share price of 760p - or as much as 940p at the higher end. Even without the deal going ahead, other closed book deals would be possible and we are forecasting tangible net asset value per share for the end of 2013 of 762p, down from 884p a year earlier. Expect operating profit of £304m for 2013.
