Aviva's (AV.) surprise interest in buying rival Friends Life (FLG) has so far failed to thrill the life assurer's shareholders. News of a possible all-share approach - Aviva is thinking of offering 0.74 of its own shares for each Friends share, valuing it at about £5.4bn - emerged after the market had closed on Friday but, during morning trading on Monday, Aviva's shares slumped 5 per cent.
That poor sentiment, it seems, significantly reflects uncertainty about how such a move fits with Aviva's stated direction of travel. "We are genuinely surprised," said sector analyst Barrie Cornes of broker Panmure Gordon. "It does not fit with previous comments by management concerning its desire not to be so UK focused." Such a tie-up would also bolster the group's exposure to a UK life market that's described by Mr Cornes as both "very mature" and "highly regulated".
Moreover, and while the slippage in Aviva's share price has depressed the offer price somewhat - to about 379p a share from almost 390p on Friday - the bid remains fairly close to the group's last reported embedded value figure (net asset value, plus the profit stream from life policies) of 404p a share. Indeed, Mr Cornes has described the offer as "more than full". So investors shouldn’t bet on a rival bidder with a better offer emerging - according to Mr Cornes, such a suitor would need to offer "north of embedded value" which he sees as "relatively unlikely".
But the proposed tie-up does have attractions. It would, for instance, more than double Aviva's corporate pension assets under management - helping to relieve pressure from declining individual annuity sales following the Budget day decision to scrap their compulsory purchase. There should also be fairly significant cost savings, of about £100m think analysts. Moreover, the highly cash generative nature of Friends' business "could accelerate Aviva's dividend paying capability", reckons Mr Cornes. It's also feasible that the move could kick-start further deals in the sector with the closed book life segment looking "ripe for consolidation" according to Stephen Bailey, co-manager of the Liontrust Macro Equity Income Fund.
