Resolution, the life assurance group, is in advanced negotiations to purchase the bulk of the UK business of French life assurer Axa for £2.75bn. The proposed deal has several similarities with Prudential's failed bid for AIA, because most of the purchase cost will be raised through a rights issue - in this case some £2bn - while the size of the transaction effectively makes it a reverse takeover, given that Resolution's market capitalisation is nearer £1.8bn.
But, unlike the Pru fiasco, Resolution's chances of success look a good deal more promising, not least because founder and insurance entrepreneur Clive Cowdery has a formidable record of success in the industry. Having established a reputation for previously consolidating a number of closed life insurance companies under the Resolution banner, he sold the £5bn group to rival Pearl at the height of the economic cycle, while retaining the Resolution name to launch a new company. If successful, the Axa business will be folded into Friends Provident, the life assurer acquired last year.
There are snags, however. Resolution's share price has fallen from 95p when the Friends deal went through, to around 60p, and a £2bn rights issue at this price will more than double the number of shares in issue. To make the deal viable, analysts estimate that Resolution will have to extract over £500m in synergies, although this number is regarded as well within the company's reach.
Moreover, the sale would advance the aspirations of both Axa and Resolution. Axa wants to move further into the less capital-intensive savings business, which attracts a useful fee income without the investment risk; which stays with the policy holder. Resolution, meanwhile, is working to build a £10bn company based on acquiring a large legacy book of assets where the attraction is to slash back-room costs and generate an attractive yield, helped both by cost synergies and also the fact that fewer participants in the market should lead to a more attractive pricing environment.
