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Resolution and Friends Provident confirmed on Monday that they wish to merge, in a deal that would create the UK’s fourth largest life assurer.
The nil-premium merger would create a combined group with a market capitalisation of about £8.5bn, of which Resolution shareholders would own 50.9 per cent and Friends 49.1 per cent. Cost savings are not being promised, since the logic lies elsewhere. Resolution, which predominantly manages closed life funds that are no longer writing new business, is strongly cash generative. Friends’ growth is severely hampered by lack of cash.
Resolution has been looking for a deal for a while. Friends may not have been its first choice, but a successful outcome will put Resolution in a strong position to finish its clean-up of the UK closed book non-annuity sector. Meanwhile, Resolution’s 7m policyholders represent a big opportunity for Friends, which will be able to cross-sell its products to them. The companies say the asset management business – Resolution’s activities in this area may be injected into F&C, in which Friends holds a majority stake – will continue in its present form.
This is not to suggest that the deal is unashamedly positive for all concerned. Relative share price moves on Monday – Resolution’s shares barely budged, while Friends’ shares rose more than 7 per cent – showed where investors felt the risks lay. Setting aside execution risk and the union of two very different cultures, the deal represents a huge broadening of Resolution’s model, which has so far focused with great success on a very specific segment of the insurance market. For Friends’ shareholders, the gains are very much more clear-cut. Its share price rise may have been in part prompted by hopes that other suitors would throw their hats in the ring. Even if they do not, this is just the shot in the arm Friends needs.