Agreement has been reached on the terms of Aviva’s proposed £5.6billion ($8.8 billion) takeover of Friends Life.
Shareholders will have an opportunity to vote on the proposed acquisition at a general meeting, which is likely to be scheduled for March 2015.
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Under the terms of the proposed acquisition, holders of Friends Life Shares will receive 0.74 new Aviva shares for each Friends Life share they hold.
The deal offers a 15% premium to Friends Life’s closing price on 20 November.
It will also mean Friends Life shareholders will own about 26% of the enlarged Aviva group.
Aviva said the newly merged company would have higher cash flows enhanced by substantial synergies, principally through operating efficiencies in the combined back books and the removal of overlapping overheads.
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By GlobalDataThe insurer added that the acquisition would accelerate the transformation of Aviva’s balance sheet, including reducing leverage and strengthening capital and liquidity.
Aviva added that the proposed acquisition would give rise to a combined central liquidity position of £2.4 billion.
It added that the deal is expected to generate approximately £225 million ($353.5 million) of run-rate annual cost synergies by the end of 2017, which Aviva has valued at approximately £1.8 billion ($2.8 billion)
Aviva believes these synergies would deliver substantial value and increase cash flow generation and said it expects significant additional value through capital, financial and revenue synergies over time.
Strategic impact
The takeover would also secures Aviva position as the largest insurance and savings business in the Enlarged Aviva Group’s home market, with 16 million customers in the UK, prior to the deduction of overlapping customers.
Aviva said it would also increase its scale in attractive segments of the UK Life market including leadership position in corporate pensions, protection and at-retirement.
It would also bring 5 million current Friends Life customers to Aviva, as well as adding significant scale to Aviva’s existing UK Life back book,
Friends Life has faced an uncertain future since April following the government’s radical overhaul of the pensions market.
Under the current tax system, people are charged 55% if they choose to withdraw all of their defined contribution pension savings at the point of retirement.
This means the majority of people instead purchase an annuity and receive taxable income over the course of their retirement.
However, in the UK government’s budget in March 2014, the UK government said under the new system, an individual will be withdraw their savings at a time of their choosing subject to their marginal rate of income tax.
Commenting on the implications of Aviva’s proposed acquisition of Friends Life from a protection market perspective, Kevin Carr, chief executive of Protection Review, said: "One that is often over looked, is the potential impact on legacy policyholders, where service tends to suffer, and likewise any potential impact on claims from companies who are technically no longer in the market."
