2nd UPDATE: Resolution Buys AXA's UK Life Ops For GBP2.75B

24th Jun 2010 11:15

(Adds detail, background, analyst and RBC comments.) By Vladimir Guevarra and Margot Patrick Of DOW JONES NEWSWIRES LONDON (Dow Jones)--U.K. consolidation vehicle Resolution Ltd (RSL.LN) and French insurer AXA SA (CS.FR) Thursday agreed a GBP2.75 billion deal for Resolution to buy some of AXA's U.K. life operations, reinforcing Resolution's aim to build a dominant U.K. life insurer through the merger of several companies and giving AXA extra cash to pursue growth in other areas. Resolution called the move a "logical next step" in its strategy that will double its market share in the U.K. life and pensions market. The AXA operations will be merged with Friends Provident, the life insurer bought by Resolution last year for GBP1.86 billion, and rebranded as "Friends Life." AXA said the sale fits in with its plan to focus on wealth management in the U.K. life and savings market, and that it remains committed to the U.K. Under the deal, expected to close in the third quarter, Resolution will buy AXA's U.K. annuity, protection and group pensions businesses, funding the purchase with a pre-emptive GBP2.055 billion rights issue, GBP500 million in deferred consideration notes issued to AXA and through bank debt. About 2,200 AXA employees will make the switch to Resolution. The deal comes weeks after U.K. insurer Prudential PLC (PRU.LN) canceled its GBP35.5 billion plan to acquire AIA Group Ltd., the Asian arm of American International Group Inc (AIG). That deal fell apart when Prudential's shareholders balked at the $21 billion they were asked to put up to help fund the takeover. AXA said net cash proceeds from its sale will be around EUR1.7 billion, which it will use to develop its U.K. wealth management business and to redeploy cash "more efficiently" throughout its operations. It will take a capital loss of EUR1.4 billion on its 2010 earnings. Nicolas Moreau, CEO of AXA UK, said the sale sharpens AXA UK's focus on future profitable growth, "and builds on the market leading position that we have developed in our wealth management business, as well as in our other businesses: general insurance, healthcare insurance and Bluefin." The purchase marks the continuation of Resolution's strategy to consolidate companies in the U.K. life insurance and asset management industry, with the aim of listing a new merged entity in 2013. Resolution is hoping to create cost and revenue synergies between the two companies and build a bigger and more competitive company. Resolution expects annualized cost savings of GBP75 million a year emerging over three years, with the full impact expected in 2014, and associated one-off costs of GBP74 million and GBP57 million respectively. Resolution Operations CEO John Tiner told reporters that the AXA transaction puts the group more than halfway toward its goal to build a life and asset management group with market consistent embedded value of around GBP10 billion. The combined business will have around GBP6 billion in MCEV, he said. The rights issue is being handled by RBC Capital Markets and Barclays Capital. Resolution is offering 17 new shares for every 30 existing ordinary shares at a price of 150 pence, a 38.1% discount to the theoretical ex-rights price of 242.2 pence per consolidated ordinary share, following a planned consolidation exercise. Resolution and its two banks also formed a group of sub-underwriters among the top shareholders, who in turn have committed to sub-underwriting more than 52% of the rights issue. Josh Critchley, Head of European Equity Capital Markets and Corporate Broking at RBC Capital Markets told Dow Jones: "What we've done which is unusual and different is we have gone to see the major shareholders before the announcement and asked them to formally commit to sub-underwrite a proportion of the rights issue. "That would normally happen on the day of announcement... So I believe this is the first time this structure has been used," he said. This reduced the risk taken by investment banks, and therefore lowered the underwriting fee to 2.72%, compared with a market average of 3.25%. The underwriting fee in the Prudential's canceled rights issue, for example, was 3.5%. A person familiar with the situation said the sub-underwriters in the Resolution rights issue will receive a fee of 1.75%, leaving 0.97% to the two banks. Analysts have said that the deal is sensible for both companies. Analysts from UniCredit said Thursday the sale underlines AXA's focus on optimizing capital allocation in life and savings operations. "This would seem to be sensible next step for Resolution, buying a reasonable business from a willing seller at what on first glance appears to be a realistic price," Oriel Securities analyst Marcus Barnard said before the final agreement was announced Thursday. Citigroup analyst Raghu Hariharan estimated that the GBP2.75 billion price represents 80% of the asset's forecast 2009 embedded value. "Resolution has enough headroom to make this deal value creative in the longer term," he said. Joy Ferneyhough, an analyst at Execution Noble, said: "Strategically, the possible sale of the greater part of AXA's U.K. life and savings business to Resolution looks sensible, given the high maturity but low margin nature of the U.K. market and AXA's franchise, particularly relative to their preferred growth businesses in Asia and other emerging markets. Resolution shares have been suspended from trading since the June 14 announcement, having closed at 60 pence on June 11. Resolution said the stock will start trading again after the rights issue prospectus is released at the end of June. -By Margot Patrick, Dow Jones Newswires; +44 (0)20 7842 9451; [email protected] (END) Dow Jones Newswires June 24, 2010 06:15 ET (10:15 GMT)