Insurance giant Aviva announced plans late on Friday to scoop up its smaller rival insurer and pension provider Friends Life in a move that suggests radical reform outlined in March’s Budget is shaking up the pension status quo.
Aviva said on Friday it has agreed terms with rival insurer Friends Life for a £5.6bn merger. The news prompted a boost of 7 per cent in the share price of Friends Life while also driving Aviva to fall 5 per cent.
According to FE Analytics, Friends Life has gained 5.51 per cent in 2014 compared to 2.97 per cent in the FTSE All Share while the FTSE All Share Life Insurance index is up 15.14 per cent
Performance of indices in 2014
Source: FE Analytics
Sheridan Admans, investment research manager at The Share Centre, says investors in both companies would stand to benefit from the merger.
“Should the deal happen, analysts believe synergies would be substantial, with Aviva’s balance sheet benefiting as would its pensions and protection operations. Friends Life investors should benefit from improved growth prospects,” he said.
“This is not a done deal. Friends Life investors may push for a higher premium or other interested parties may show their hand, however, the latter is assumed to be unlikely given the size of the deal and the implication that may pose. Friends Life has suspended its share buyback programme for the time being.”
“Due to the merger activity we are downgrading Aviva to a ‘hold’ recommendation while it goes through firming up the terms of its deal with Friends Life. We continue to have faith in Aviva’s recovery outlook and any share price weakness may prove a good entry point. We also recommend Friends Life as a ‘hold’ for investors during this process.”
Stephen Bailey, co-manager of the £545m Liontrust Macro Equity Income fund, says the deal may spark further bid activity in the sector.
“Friends Life will appeal to Aviva on a number of levels, not least due to its high free cash flow generation and its exposure to a UK life market which has been given new impetus by this year’s Budget changes,” he said.
“Through this agreed all-share deal Aviva should be able to achieve scale in the corporate pension market, an area in which Standard Life has so far been the standard bearer.”
He says chancellor George Osborne’s announcement in March that over-55s would be able to drawdown their pensions have been partly responsible for the sector’s recent bouce.
“The pensions reforms announced in the Budget were initially seen as unfavourable for the life industry, but investors are now coming round to the idea that necessary changes have been catalysed. Product offering within the retirement market is now increasingly important, and we believe that we are likely to see further corporate activity within the sector.”
The uptick in Friends Life has boosted the portfolios of a number of managers who hold the stock as a major position in their funds. Some 20 funds in the IMA universe hold the stock as a top 10 holding.
The £564m Majedie UK Income fund, managed by FE Alpha Manager Chris Reid, has the largest exposure to Friends Life with 5 per cent of the portfolio in the stock.
However, Reid also owns Aviva as a top position, making up 3.7 per cent of the portfolio and therefore cancelling some of the gains.
Richard Buxton (pictured) is the only other manager to hold both stocks as top 10 holdings. In his £1.6bn Old Mutual UK Alpha fund he has 3.52 per cent in Friends Life and 3.69 per cent in Aviva.
Kevin Murphy and Nick Kirrage, co-managers of the £1.5bn Schroder Income and £620m Schroder Recovery funds, hold Friends Life as 4.89 per cent and 2.97 per cent of the respective portfolios.
Another Schroders fund, the £1.1bn Schroder Income Maximiser, has 4.9 per cent exposure to the stock. Managed by Thomas See since April 2009, the fund is the same as Murphy and Kirrage’s Schroder Income although it also uses derivatives.
Five Invesco Perpetual funds hold Friends Life as a top 10 holding with FE Alpha Manager Martin Walker, who heads up the £211m Invesco Perpetual Childrens fund, having the largest position at 4.89 per cent.
Two other of Walker’s funds have exposure to Friends life. The £1.2bn Invesco Perpetual UK Growth and £245m Invesco Perpetual UK Aggressive have 4.51 and 4.37 per cent respectively.
Source: FE Analytics
Two M&G funds also have top 10 exposure. The £1.3bn M&G Dividend fund, managed by Phil Cliff, has 3.1 per cent while the M&G European Strategic Value has 2.06 per cent.
Another FE Alpha Manager Alex Wright, who heads up the £2.7bn Fidelity Special Situations fund, has 2.6 per cent, as does FE Alpha Manager Ben Wallace, manager of the Henderson UK Absolute Return fund.
