July 1, 2008 1:35 pm
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Pension transfers in the UK are set to reach record levels in 2008 and can be seen as a barometer of future M&A activity, industry sources have said.
The UK pension transfer market, which saw a sevenfold increase in the amount of business written in the first half of 2008 to GBP 4.1bn, is on target to reach GBP 10bn for the full year with transfers unblocking the path to future M&A opportunities, the same sources said.
Charlie Finch, Partner with specialist pension buyout advisory Lane Clark & Peacock, noted that full buyouts in particular, whereby companies transfer the whole of their pension liabilities to a specialist insurer, could be seen as first steps toward M&A transactions, since the removal of these liabilities makes a company a more attractive target for bidders.
Companies that have recently concluded this type of deal include Emap, Eni Lasmo, Rank and Powell Duffryn.
In the case of EMAP, the UK publishing and media house, the company’s November 2007, GBP 170m deal with pensions buyout specialist Paternoster was followed in January 2008 by the divestment of its radio stations to German media sector peer Bauer. The remainder of the company was acquired in March/April through a joint bid by the Guardian Media Group and private equity firm Apax Partners.
A second example of this type of “clean break” deal was a GBP 700m transaction in February 2008 involving UK-listed leisure group Rank Plc and the specialist insurance subsidiary of Goldman Sachs in which the latter took on the company’s liabilities in return for a GBP 20m one-off payment. The company’s CEO Ian Burke later denied that the company had transferred its pension liabilities as a prelude to a restructuring or a sale – but rumours later surfaced that Genting, the listed Malaysian gaming company, was planning to make an offer for its UK-based peer. Finch noted that he “wouldn’t be surprised” if Rank became involved in an M&A situation following the Goldman Sachs deal.
Even partial pensions liability transfers are often a prelude to M&A activity – as can be seen with Friends Provident’s transfer of roughly one-third of its pensions liabilities to Norwich Union in early May. Here the transfer removed a potential barrier to a strategic review that will see the sale of wealth management subsidiaries Lombard and Pantheon and the company’s 50% stake in asset management firm F&C.
Interestingly, however, despite the fact that these kinds of buyouts are often a precursor to an M&A transaction of some sort, share prices tend not to react positively to pension transfer announcements. EMAP’s November 2007 announcement of its GBP 170m pensions deal, for example, was followed by just a 2% increase in the company’s share price on the day and a 1.3% increase a week from the announcement. Likewise, Rank Group’s February 2008 transfer of GBP 700m of liabilities was greeted with a 7.8% decrease in the company’s share price, recovering somewhat to a 2.8% decline a week after the announcement. On the other hand, Delta’s announcement of a GBP 450m transfer of liabilities to buyout specialist Pension Insurance Corporation (PIC) was met with a 6.3% rally in the company’s share price. This, however, can be explained by the fact that the announcement accompanied a very positive trading update.
Given the increase in the volume and size of transactions to date it is no surprise that the buyout specialists themselves are confident of a record 2008. Mark Wood and Jonathan Bloomer, chief executives of buyout firms Paternoster and Lucida, respectively, both agreed that the pipeline for upcoming deals will see future buyout values outstrip those of previously announced deals.
Speaking to this news service, Lucida CEO Bloomer said the company had a pipeline of deals involving assets in the range of GBP 30-40bn. This tallies with estimates from Lane Clark & Peacock of deals involving at least seven schemes above GBP 1bn-plus and 10 FTSE 100-listed companies that have requested in-depth quotations for buyouts.
As an example of this type of deal, both Lucida and Paternoster are believed to be involved in the previously reported transaction of Cable & Wireless pension schemes, worth some GBP 2bn. “I am sure something will happen with this deal this year,” Bloomer said, adding that pension buyout discussions can take as long as one full year. A Cable & Wireless transaction would be the first single transaction worth more than GBP 1bn. Wood noted however that other GBP 1bn deals could be finalized ahead of a Cable & Wireless announcement.
When questioned why the buyouts market has grown so strongly, Bloomer noted that buyout costs for companies have gone down, partly as a result of an increase in competition between specialist acquirers. This is borne out by the fact that there are now 11 insurance companies specializing in longevity risk and investment whereas prior to 2006 there were only two companies of this type. Along with original market incumbents Legal & General and Prudential, they include Lucida, Paternoster, AIG Life, Goldman Sachs (Rothesay Life), MetLife, Norwich Union, Pension Insurance Corporation (PIC), Prudential and Synesis Life.
Lane Clark & Peacock estimates that a margin of 10% over a scheme’s pensioner liabilities is a “typical” price paid by a company to complete a transfer. As an example of intense price competition, however, it notes that “a number of recent pensioner buyouts have been agreed below this level.”
A second dual catalyst for an increase in deal heat is, firstly, higher bond yields as a result of the subprime crisis and, secondly, higher assumptions about longevity on the part of companies operating pension schemes. The former means buyout companies have to buy fewer bonds to fund their bought-out pension schemes; while the latter means the companies themselves have put aside higher reserves in the past to fund their own schemes. In the words of Wood: “The gap between the assets and liabilities is closer and many schemes are now actually in surplus.”
For the future, neither Wood nor Bloomer see an end to buyouts. Bloomer pointed to Germany, the Netherlands, the US and Canada as markets with a similar pensions structure to the UK. He also pointed to Lucida’s EUR 140m deal insuring Bank of Ireland Life liabilities, noting that the Irish market “has not been developed yet, but has a lot of potential”.
Meanwhile, Lane Clark & Peacock analysts point out that with a total volume of potential business of more than GBP 1000bn, even at a rate of GBP 10-15bn per year it would still take over 70 years before all Defined Benefit schemes are transferred.
In Bloomer’s words: “We’re still only scratching the surface.”
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