Aviva agrees £5.6bn deal to buy rival blue-chip life insurer Friends Life

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Aviva last night agreed to buy rival blue-chip life insurer Friends Life for £5.6billion.

The proposed deal would see the FTSE 100 insurer pay 398.9p a share for Friends – a 15 per cent premium to its 347.7p closing price on Friday. The combination of the two companies would create the UK’s biggest insurance, savings and asset management business with 16m customers and a market value of around £20billion.

It would be the largest deal in the UK insurance sector since the merger of CGU and Norwich Union to create what is now Aviva nearly 15 years ago.

Insurance giant: Aviva has 540,000 private shareholders

The board of Friends said it is ‘willing to recommend’ the terms of Aviva’s offer to its shareholders although the companies added ‘there can be no certainty’ a formal offer will be made.

The tie-up could help the pair cope with the dramatic overhaul of the pensions system unveiled by George Osborne in the Budget in March.

The Chancellor’s reforms – which allow savers to cash in their pension pots – have led to a large drop in annuity sales. The proposed deal marks a bold move by Aviva, which is still rebuilding after the disastrous reign of disgraced former chief executive Andrew Moss. He was fired in 2012 after furious shareholders rejected his pay package of up to £5.2million and protested against years of dismal performance.

The firm has undergone a radical restructuring under new boss Mark Wilson, selling off underperforming parts of its business including its US arm and axing more than 2,000 staff. Aviva made a profit of £2.2billion profit last year, following a £2.9billion loss the previous year.

Wilson believes the £5.6billion deal will create a British national champion in the insurance industry, capable of taking on the likes of French giant Axa and Allianz of Germany.

Aviva has 540,000 private shareholders, most of whom received free shares in the flotation of the old Norwich Union, one of the companies making up the huge FTSE 100 pensions and insurance operator.

The combined group will span life assurance, pensions and so-called general insurance, such as motor and home contents cover. A merger also offers the potential to strip out many millions of pounds in costs.

Friends has 4,000 staff worldwide. Aviva employs 27,700 globally and 5,200 in UK.

Wilson believes Friends, led by chief executive Andy Briggs, will be a good fit with Aviva because it is big in the protection market, selling policies covering customers against critical illness and the like.

A deal would double Aviva’s clout in that market at a stroke.

Friends is also strong in corporate pensions, where it provides ‘defined contribution’ plans that invest employees’ savings on the stock market. A combined group would also have more scope to keep its hands on maturing pension fund cash. 

At the moment, savers take around £2bn a year of their nest-eggs to invest elsewhere, because Friends does not have a wide range of products for retired people. Aviva, however, has a selection of products available. Aviva (up 6.5p to 539p) was forced to rush out a formal announcement late yesterday after the stock market closed as details of the bid leaked out.

The proposed deal would see Friends (4.4p higher at 347.7p) shareholders receive 0.74 Aviva shares for every one of their own – leaving them with around 26 per cent of the enlarged group. Friends shareholders would also receive an amount in cash equal to any Friends final dividend for the 2014 financial year. 

Friends saw profits fall 7 per cent to £159million in the first half of the year as it was hit by the Chancellor’s pensions reforms.