Lincoln National, Jefferson-Pilot To Combine In $7.5 Billion Deal

Analysts divided on combo and whether it will jump-start more consolidation

Lincoln National Corp.’s $7.5 billion offer to buy Jefferson-Pilot Corp. was met with mixed reviews by industry analysts. While many saw promise for the combined company in the deal, one team called it a merger of “desperate housewives.”

The combined companies would operate under the name Lincoln Financial Group, offering life insurance, annuities, and retirement and investment products and services as well as an array of group benefits.

A few days before the deal was announced, Andrew Kligerman of UBS Securities LLC, New York, forecast an LNC-JP combination as one of several mergers and acquisitions possible in the life insurance industry in the year ahead.

Following the announcement, Kligerman said the merger would be a plus for LNC because of long-term cost savings and improvement to its market value. He said management’s projected earnings increase of 6% to 7% was “reasonable.”

Still, costs of the merger would dilute profits for at least three years, he said.

Jason Zucker and John Nadel, analysts for Fox-Pitt Kelton Group Inc., New York, called the deal a merger of “desperate housewives” because “these companies combined out of weakness, as growth has been stalled.”

The new company would face growth problems stemming from excessive reliance on universal life insurance and fixed annuities, products that make them vulnerable in a low-interest-rate environment, they stated in a report.

Zucker and Nadel calculated the new company would have an estimated 31% of its earnings from equity-sensitive products, down from 50% for LNC currently.

They projected 45% of the combined companies’ business would come from life insurance, primarily UL; 28% from annuities; 7% from Benefit Partners, a J-P unit; 2% from Delaware Investment Management; 4% from J-P’s communications businesses; and 4% from LNC U.K.

Neither LNC nor J-P had strong earnings growth in the past couple of years, the analysts observed.

Kligerman, however, predicted earnings growth of 10% annually in 2007 and 2008 for the combined firms.

Standard & Poor’s Ratings Services, New York, was upbeat on LNC. However, it said the planned merger could undermine J-P’s creditworthiness.

S&P analysts thought the merger would enhance LNC’s ability to execute its operating plans, improve cash flow, advance its financial leverage and build market position.

The S&P analysts did express reservations about the companies’ ability to integrate operations and about the adverse impact of current low interest rates. They also anticipated a need for LNC to increase reserves for its UL products.

“Nevertheless, Standard & Poor’s believes that upon successful completion of the merger, the ratings on LNC and its life insurance operating companies will be raised,” albeit slightly, the analysts said.

Fitch Ratings Services, Chicago, said integrating the firms would pose challenges but believed it promised significant strategic benefits for both firms.

In a statement, Fitch said “the merger will strengthen the combined company’s competitive position in the individual life insurance business and expand and diversify distribution capabilities.”

Brad Ellis, a Fitch director, said he was “a little surprised” by the merger, noting he had viewed both companies more as targets for acquisitions by others rather than with each other.

He said he didn’t believe the merger would touch off acquisition activity in the life insurance business but added there are a number of midsized players that could be targets.

As for who the acquirers might be, he speculated that MetLife and Prudential Financial might be contenders. AIG might be out of the running for a while due to its preoccupation with investigations by the SEC, he added, while LNC itself “would probably be tied up for a while” with the details of its acquisition.