As Aviva agrees a £5.6bn takeover of Friends Life, does the acquisition make strategic sense?
Ben Cohen, an insurance analyst at Canaccord Genuity, says Yes.
Aviva’s core strategy is “cash plus growth”, and this deal adds materially to cash flow, which will be used to pay a higher dividend and invest across the group for growth.
This is not just jam tomorrow – the 30 per cent increase in Aviva’s final dividend for 2014 was much better than the market had expected.
Taking key members of the Friends Life team to run UK Life and manage the life books gives us confidence that the £225m annual synergies will be delivered.
The deal lowers gearing and improves liquidity, reducing downside risks if interest rates rise or equity markets worsen.
Strategically, Friends Life reinforces Aviva’s leading position in the UK life market, with complementary strengths in corporate pensions, protection and retirement income. This also extends its cost advantage over peers, and helps build out asset management, where Aviva has underperformed relative to its potential.
Eamonn Flanagan, a director at Shore Capital, says No.
The news that Aviva has completed a £5.6bn deal to buy Friends Life will no doubt be welcomed by many shareholders on both sides of the tie-up, with the announced dividend payments and cost savings coming in at higher levels than most initially expected.
But there are issues with this deal.
First, the planned timescale for the delivery of the cost savings – which are put at around £225m by 2017 – is disappointing, as is the estimated time that will be required to deliver a neutral impact on the company’s earnings.
And there are even bigger questions remaining.
Why does Aviva feel the need to do this particular deal right now? Is it camouflage for issues within its own internal restructuring and turnaround story?
Overall, we view this deal as effectively a rights issue in disguise, and it will do little for the strategic positioning of Aviva in the long term.