Resolution GBP2.75B Plan To Buy AXA's UK Life Ops "Sensible"

14th Jun 2010 12:38

By Vladimir Guevarra Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Resolution Ltd.'s (RSL.LN) management is starting to meet with shareholders this week to gain further support for its planned GBP2.75 billion purchase of AXA SA's (CS.FR) U.K. life insurance operations, a deal generally welcomed by analysts as a "sensible" move. Analysts said Resolution is getting a 20% discount off the embedded value of AXA's assets, which in turn would be merged with Friends Provident, Resolution's first acquisition, to form a more formidable life insurance business in the U.K. "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. "The management of Resolution will be acutely aware of the risks of financing such a transaction, following the failed Prudential deal. We would expect management to be talking to shareholders to ensure their continuing support for the transaction and rights issue," Barnard said. "In our view, this is likely to please the market as there were some concerns that the current strategy had become unstuck," Shore Capital analyst Eamonn Flanagan said. "The intention by Resolution is to consolidate the AXA U.K. life operations with Friends Provident, giving the combined group a pretty significant position in the U.K. risk and group pensions market," said Flanagan, who had buy rating on the stock. Citi analyst Raghu Hariharan estimates 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. The deal also appears sensible from AXA's point of view, many 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. "While there is a small hit to total book value today, we would assume that the deal could be accretive in the medium term if AXA are to reinvest the proceeds in faster growing, higher margin businesses elsewhere, with Asia being the obvious candidate," Ferneyhough said. Resolution and AXA Monday morning separately confirmed they were in talks. At 1115 GMT, AXA shares in Paris were up 2.7% at EUR13.47, while Resolution's shares were suspended from trading. Resolution said the tag price for AXA's U.K. life business will be funded by a pre-emptive rights issue of around GBP2 billion, GBP500 million of deferred consideration notes issued to AXA and also through bank debt. AXA will use part of the cash it gets from the sale to buy back EUR900 million worth of shares in its AXA Asia Pacific Holdings unit that are currently held by AXA Life U.K. and would otherwise go to Resolution. Including the buyback AXA will be left with net cash proceeds from the Resolution deal of EUR1.7 billion AXA would retain and focus on growing its U.K. wealth management business. Resolution said it is aiming to announce a transaction before the end of June. A person familiar with the situation said Resolution's management has started meeting investors Monday and that the initial response is they are supportive of the deal with AXA. The talks between Resolution and AXA, first announced on Friday night, comes just a week after 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 after shareholders balked at the massive $21 billion they were asked to put up to help fund the takeover. Pru's shareholders also worried over risks involved in integrating Prudential's and AIA's operations in various markets in Asia. The person said Resolution's rights issue will be launched if a deal is announced toward end-June. Based on its previous statements, Resolution has less than 10 months in its self-imposed time scale to buy two more companies to merge with Friends Provident, with a further aim of listing a new merged entity in the next few years. Last month, Resolution Operations CEO John Tiner said that the company's shareholders are ready to invest more money to fund more acquisitions. Tiner said the company's investors "have the firepower for investing significant additional money into the company to finance the consolidation through additional equity raising and cash consideration in any bid situation." Tiner said that during the company's listing in December 2008, Resolution "invited shareholders to think about being able to extend their investment in the company to a multiple of three to five times at least on an initial transaction." Resolution was able to raise GBP660 million during that listing. After meeting investors, Tiner said last month he believes they are still willing to raise their initial investments by three to five times. "That's why not only do we feel confident about the deal flow on the other side, but we feel very confident about our ability finance a substantial transaction as well," Tiner said then. Resolution paid GBP312 million in cash and issued 1.752 billion new shares as part of the acquisition of Friends Provident, valuing the company at GBP1.86 billion. -By Vladimir Guevarra, Dow Jones Newswires; +44 (0) 2078429486, [email protected] (END) Dow Jones Newswires June 14, 2010 07:38 ET (11:38 GMT)