Aviva agrees to buy Friends Life for $8.8 bn

Aviva Plc, Britain's second-largest insurer by market value, agreed to buy Friends Life Group (FLG) for about £5.6 billion ($8.8 billion) in stock in the UK insurance industry's biggest takeover in 15 years.

Aviva, which last month disclosed it was in talks with its smaller competitor, is offering 394 pence in stock for each Friends Life share, according to a statement on Tuesday. That's a 15 per cent more than Friends Life's closing price on November 20. Both boards have agreed to the terms of the transaction.

Aviva said buying Friends will give it access to the smaller insurer's cash flow, allowing Chief Executive Officer Mark Wilson, 48, to speed future dividend increases. Aviva's shares have fallen 7.4 per cent since the talks were disclosed last month as the proposal divided analysts, with some criticising Wilson for bulking up in the UK instead of expanding abroad.

"It allows them to cut costs and combine two businesses with different risk mix and that's positive but that's about it really," said Andy Hughes, an analyst at Exane BNP Paribas in London before the announcement. He has an underperform rating on Aviva shares. "Wilson has done a pretty good job until now, but we have got to see what he's going to do with Friends Life. It doesn't make a lot of sense to me."

Friends Life shares closed at 336.20 pence in London trading on Monday night. They have increased 3.5 per cent this year. Friends Life's shareholders will own about 26 per cent of the combined company, Aviva said.

The combined Aviva and Friends Life will have 16 million customers, challenging Legal & General Group Plc's position as the largest manager of UK pension assets.

The deal is expected to result in an additional cash flow of about £600 millionper year, with savings seen at about 225 million pounds, according to the statement.

Wilson installed as Aviva's CEO in January 2013 after a shareholder revolt cost his predecessor his job. He has changed at least half of his senior managers and sold off assets as he strived to rebuild capital, increase cash flow and shrink billions of pounds.

Analysts including Sanford C. Bernstein Ltd.'s Edward Houghton and Deutsche Bank AG's Oliver Steel said the deal will address some of those challenges.

Aviva has also been seeking to boost profitability and increase third-party assets at its investment unit after hiring Euan Munro from Standard Life Investments late last year. The company today said deal would add about 70 billion pounds of Friends Life's U.K. assets, increasing funds under administration to about 309 billion pounds.

Friends Life was one of the worst-performing U.K. insurance stocks this year after the government scrapped rules that pushed retirees to buy an annuity, threatening a key source of domestic profit growth.

The takeover is the biggest among British insurers since CGU Plc's 7.4 billion-pound merger in 2000 with Norwich Union Plc, which created Aviva, according to data compiled by Bloomberg.

Morgan Stanley (MS), JPMorgan Cazenove and Robey Warshaw advised Aviva. Friends Life was counseled by Goldman Sachs Group Inc., Barclays Plc and RBC Capital Markets.