MARKET COMMENT
Friends Provident Publishes Its Prospectus

By Stuart Watson (TMFTiger)
June 12, 2001

Great Titchfield Street, London -- Today Friends Provident is publishing its prospectus and sending a mini version plus an information pack to 2.5m eligible members and customers. It has set an indicative price range of between 210p and 270p. The price won't be set until Friday 6 July and trading in the shares will begin on Monday 9 July. At the middle of this price range Friends Provident would be valued at £3.8b, which would be enough to see it enter the FTSE 100.

There will be a Preferential Offer for eligible members and customers which will give them a 5% discount compared with institutional investors. In addition a bonus share will be offered for every 20 shares still held a year later. The deadline for applying is noon on Tuesday 3 July. This is also the deadline if you want to sell your shares immediately. Overall Friends Provident is looking to raise £1.4b.

This makes the decision process more complicated than other recent issues. In addition to deciding whether to keep their existing allocation of shares individuals also have to decide whether they should apply for even more.

The discount may sound appealing but it shouldn't really figure in your decision. The prospects for the business relative to its valuation are far more important. It has to be said that, at the moment, they don't look too rosy. New Life and Pension business sales fell 8% to £352m in 2000. Savings and investment business fell as well due to lower endowment sales and reduced levels of 'carpetbagging'. But there was an increase in other pension business, such as stakeholder style products. However, new business sales have fallen again in the first quarter of 2001 and for the full calendar year sales are expected to be lower than 2000 with margins on these sales falling due to the continued take up of stakeholder style pensions.

What Friends Provident will do with the proceeds isn't very clear either. Part of it will be used for acquisitions but it appears that the majority will be used to shore up the company's existing business, including its With Profits Fund. The part of the press release describing the use of funding seems designed to confuse.

Valuing insurance companies is a notoriously complex business. Currently, a measure called embedded value appears to be flavour of the month. This is a company's current net asset value plus the present value of future anticipated earnings of the existing life insurance portfolio. This complex calculation apparently comes out at £3.7b, a whisker under the mid-price for the offer. That puts it on a similar valuation to other mid-sized insurance groups, such as Britannic (LSE: BRT). This suggests that the shares may offer little value, for the moment at least.

More: Friends Provident discussion board