The proposed £8.3bn merger of Resolution and Friends Provident has led to a frenzy of speculation on the motivation behind the deal.
In a joint statement, the firms say “a merger would create significant value for both sets of shareholders by combining Friends Provident's new business growth opportunities with Resolution’s strong cash flow generation”.
The statement adds: “The potential synergies arising from a possible merger will reflect the already highly efficient nature of Friends Provident's back office processing and Resolution's recent outsourcing agreement with Capita”.
The merger would extend to products, customers, distribution, financial profile and management.
However, while Resolution's intentions appear clearer, speculation is rife concerning Friends Provident's motivation.
Many see the announcement as a way for Friends Provident to ‘flush out’ other interested parties, with the company a long-time potential takeover target of French insurance giant AXA, who already holds an estimated 12.5% stake.
Whatever the intentions of the group, the news has already been extremely positive for shareholders especially Friends Provident investors with its shares increasing by over three times more than Resolution's in early trading.
If agreed, the merger would involve an all-share combination of the two groups; with Resolution shareholders owning 50.9% and Friends Provident shareholders 49.1%. However, many see the deal failing unless Resolution offers better terms for Friends Provident shareholders.
A merger would be good news for policyholders in the two groups especially as there are not big overlaps within the fund ranges.
Resolution hit the headlines recently for its acquisition of closed books of life business including Scottish Provident and Abbey National Life in September 2006. It has also been looking to improve its standing in the protection arena where Friends Provident currently has a presence.
But staff concerns must be high. Resolution appointed Capita to take over the customer service and administration of its life and protection businesses, in a deal worth £580m over 12 years.The deal, commencing on 1 August, is widely believed to have led to job cuts and it is hard to see how more losses would be avoided under this proposal.
Despite talk of sluggish performance, Friends Provident has also been active lately, expanding its intermediary arm with the acquisition of the Sesame Group for an initial £75m and an initial £16.8m for Pantheon Financial.
It is also in the early stages of developing a wrap platform. This would give Resolution another string to its bow and boosts suggestions from analysts it has the most to gain from the partnership.
At such an early stage, with just weekend speculation and a Monday preliminary announcement, details are hard to come by. What is certain is that a merger would be another large step towards the predicted consolidation of the UK financial services industry. Whether this will benefit or harm shareholders and policyholders in the firms concerned and the wider industry in the long term remains to be seen.
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