(Bloomberg) — Aviva Plc, Britain’s second-biggest insurer by market value, fell the most since July in London trading after saying it’s in talks to buy Friends Life Group Ltd. for about 5.4 billion pounds ($8.5 billion) in stock.

Aviva said after trading closed on Nov. 21 that it’s offering 0.74 of a share for each share in Friends Life, whose investors would own about 26 percent of the combined company. At last week’s closing share prices, the offer was worth 398.9 pence, a 15 percent premium.

Shares of Aviva fell as much as 4.4 percent and were down 4 percent to 517 pence at 8:22 a.m., while Friends Life rose 7.4 percent to 369.1 pence, the biggest gain in two years. The offer is worth 5.4 billion pounds at current prices. A transaction would be the biggest takeover in the U.K. insuranceindustry in 15 years and create a company with 16 million customers.

“Investors were expecting expansion of general insurance, together with a bigger Asian presence” from Aviva’s strategy, making the Friends Life proposal “an opportunistic detour,” James Shuck, an analyst at UBS AG in London who rates the shares neutral, said in a note to clients.

The deal would need to generate an “unlikely” 300 million pounds of savings to offset the share dilution, he said. Before today, Aviva was up almost 20 percent this year, the best performance in the nine-member FTSE 350 Life Insurance Index. Friends Life was the second-worst performer.

Annuity Business

Aviva has been seeking to attract more funds to its investment business to cushion the decline in sales of individual annuities after the government scrapped rules forcing retirees to buy the products. It said a deal would more than double the value of the assets it manages for company pension plans and let it reduce costs.

“This deal makes sense in terms of being able to gain scale quickly and be more competitive,” especially in bulk annuities, said Charlie Wilson, a portfolio manager at Thornburg Investment Management Inc. in Santa Fe, New Mexico, who helps oversee $20 billion including Aviva shares.

Friends Life said it’s willing to recommend the key terms of the proposed deal to shareholders. The takeover would be 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.

The British takeover rules give Aviva a deadline of Dec. 19 to make a formal offer or walk away and, under most circumstances, be banned from making another bid for six months.

“We expect a fight from Friends Life shareholders and this is by no means a done deal,” UBS’s Shuck said.

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