Who’s going to jump first to break up this little friendship? The merger talks between Friends Provident and Resolution to create the UK’s fourth largest insurer, which were confirmed on Monday, puts Friends squarely in play.
The nil-premium, all-share merger, worth just north of £8bn, offers the chance for a rival, such as France’s Axa, Old Mutual or a grouping such as Standard Life and buyout group JC Flowers who have previously cast an eye over Friends, to gatecrash the deal, with a cash exit for shareholders at a premium to where Friends is trading.
But is there a separate sub-plot here? FT Alphaville understands that back in February, Standard Life themselves approached Resolution, about a plan that would see it bring both the closed book consolidater and Friends Provident into its stable. According to one financier, after an initial rebuffal, the talks were resumed in recent weeks.
What is not clear is whether Resolution and Friends have now teamed up in a rather ill-conceived defensive move to ward off Standard Life, or whether their merger of equals could be the presursor to a deal with the Edinburgh-based insurer, which has a market value of about £7bn. Standard Life could stand back, let the pair drive through a merger, before stepping in to snap up the enlarged business in one bite.
Others dismissed the idea that there is a behind the scenes plot being hatched, saying that Friends and Resolution were aware of the risks of a third party breaking up the deal and were taking steps to hamper such a move by a rival.
With the question of ongoing management largely resolved – Resolution’s chairman and chief executive look set to keep their roles in the enlarged group - financiers suggested on Monday that the team were hoping to move quickly, aiming to announce terms of the deal later this week.
In Monday’s statement, Resolution and Friends acknowledged one weakness that a potential marauder could exploit. Do not expect, they rather tacitly said, an impressive number for synergies. The potential savings arising from a merger would “reflect the already highly efficient nature of Friends Provident’s back office processing and Resolution’s recent outsourcing agreement with Capita.”
For Resolution, which has grown rapidly through a strategy of buying up closed life funds, which no longer write new business, the deal would mark a departure. Friends is an aggressive writer of new business, though strains on cash flow may have made it more amenable to a deal with Resolution, whose ‘closed book’ business spins off capital. But folding Friends’ closed funds into Resolution, some head office savings, and the muted combination of the asset management arms are unlikely to generate a headling grabbing number for cost savings in the deal.
A future combination with Standard Life could therefore make strategic sense, with Resolution’s management taking charge of the ‘zombie’ funds business, leaving the Standard Life team to develop the active book of business.