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U.K. Prudential Spurns Aviva Offer

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A spurned offer to merge Prudential P.L.C. into Aviva P.L.C. has analysts parsing both the transaction and the possible next step as well as assessing the European life insurance market.

On March 16, Aviva proposed a stock merger valued at ?17.1 billion (U.S. $29.9 billion). The combination would use a ratio of 82 new Aviva shares for every 100 Prudential shares, a 10% premium for Prudential shareholders. The transaction, Aviva said, would result in ?320 million (U.S. $560 million) in annual before-tax savings.

Prudential has an international presence in Asia and the United States and is the parent of Jackson National Life Insurance Company, Lansing, Mich. Aviva has a strong presence in Europe.

Aviva says 62% of its net premium is in the United Kingdom, 23% in continental Europe and 15% in the rest of the world.

Prudential says that of a total ?1.85 billion in insurance sales in 2004, ?800 million in sales were from operations in the U.K. and Europe; ?450 million in the U.S.; and ?575 million in Asia. That breakout would be roughly 44% in the U.K. and Europe, 25% in the U.S., and 31% in Asia.

The combined market value of the two entities, which some are calling ‘Pruviva,’ would total approximately ?49 billion and rank fourth worldwide, according to a chart in a Sanford Bernstein report using Bernstein and Bloomberg data. “Pruviva” would fall behind ING, AXA and Allianz (see chart).

But, Prudential P.L.C. says this is not going to happen with the Aviva proposal. In a statement, Prudential’s chairman, Sir David Clementi, states Prudential’s recently released results suggest good growth potential for the company. A combination, he asserts, would dilute that growth.

Analysts are trying to assess the current status of both companies.

“Aviva certainly has been looking to build a presence in the U.S.,” says Cynthia Crosson, director, Fitch Ratings, New York. Currently, the operations in the U.S. are small and it needs to build a presence here, she continues.

Fitch says in a statement that any merger between Aviva and Prudential could result in changes to their ratings with potential downward pressure on Prudential’s ratings and potentially positive ratings on Aviva. The ultimate ratings would depend on a full analysis of the combined company, Fitch says.

“Historically, the Aviva group has been very successful in executing mergers,” says Sanjeev Shah, a Fitch director in London. “However, if a potential bid for Prudential were successful, this would be Aviva’s biggest merger to date and would, therefore, also be the most complex to integrate.”

Fitch also notes the “strong capitalization” of both companies and the lack of concern about leverage since the proposal calls for all equity financing.

Bruno Paulson, an analyst with Sanford Bernstein & Co.’s London office, says if such a transaction were to occur, the estimated impact would be a 1% increase in Prudential’s 2007 earnings per share and a 1% decrease in Aviva’s EPS.

In a March 20 report, he writes that he believes the key to the merger would be Aviva’s success in convincing investors in both companies that the transaction would create “significant value.”

Of Aviva’s cost-cutting claim, Paulson writes, it would add an additional 6% to the two groups’ combined 2007 profits. But, he notes, “we remain to be convinced on these cost savings and believe that ?50 million [U.S. $87.5 million] from a chunk of the U.K. individual annuity business needs to be counted in, along with any hit from aligning the accounting techniques.”

The shedding of this business could result, according to Paulson, because of monopoly concerns.

“If you believe the ?320 million savings,” he continues, “then Aviva can go to offer 90 shares rather than 82 for 100 Prudential shares….”

Paulson writes while the merger would create a “top-tier” insurer, the benefits to Prudential are less clear since the offered price is not far above Prudential’s fair value (?6.40 per share by Bernstein estimates), and Prudential would have enough cash to fund its growth plans.

Gains from capital efficiency would be about ?40 million and cost savings at about ?100 million but shedding its annuity business would result in a loss of ?50 million, he writes.

“The ghost to this particular feast is the prospect of a third-party bid, with AXA as the prime suspect,” Paulson adds.

Both AXA and AIG have been named as potential suitors for Prudential P.L.C., but spokespeople for both insurers declined to comment. Zurich and AEGON also refused to comment.


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