Aviva’s (LSE: AV) £5.2bn merger with Friends Life Group (LSE: FLG) is the largest deal agreed between UK companies in more than six years. The deal is set to change the face of the UK insurance market.
But some investors are unsure about the benefits of the deal. Specifically, Capital Group is one of the world’s largest asset managers and had been one of Aviva’s largest shareholders… until the deal was announced.
At one point Capital held 3.9% of Aviva’s outstanding shares, worth around £560m at current prices. However, a few days after the deal with Friends was announced, Capital reduced its holding to 1.2%. There’s no other reason to explain why the asset manager would make this sudden change, unless it was worried about the merger.
Some support
Still, other institutional investors have signalled their support for the deal but some analysts are worried. In particular, City analysts are worried about Friends’ exposure to the UK’s life assurance market, as well as the impact this year’s pensions reforms will have on the company’s outlook.
While it’s true that a combined Friends-Aviva company will be able to compete more effectively in a shrinking market, falling annuity sales will be a thorn in the side of the group.
Most of the growth from the deal, in the near-term at least, will come from merger synergies. Aviva’s management is planning to produce £225m a year in cost savings once it acquires Friends, while there will also be increased benefits to customers as synergies flow through. Merger and integration costs are set to total £350m, of which £200m will be incurred next year. Aviva itself is planning to cut a further £1.8 of costs out of its own business.
And hopefully the size of the enlarged Aviva will attract customers seeking security, as the merged entity will have greater financial firepower than either standalone company. Aviva’s cash generation will increase and the company will be able to pay down debt at an accelerated rate — the all-stock nature of the transaction means that the merger will not have an effect of Aviva’s debt level. Friends Life shareholders will own 26% of the enlarged company.
The bottom line
Overall, the fact that Capital has sold a portion of its Aviva shareholding is concerning. It seems as if the asset manager is worried about Friends’ exposure to low-growth markets.
Nevertheless, the deal between Aviva and Friends has many benefits, the most important of which is the enlarged group’s size and financial firepower. Cost savings should also help drive growth in a low growth market.
