City sees Barclays/L&G merger as a logical step

A merger between Barclays Bank and Legal & General to form the biggest bancassurance group in the UK would be welcomed in the City. However, as Andrew Verity and Lea Paterson discover, any expansionary acquisition by Barclays would come at a hefty price.

Both Barclays and Legal & General yesterday declined to comment on reports suggesting that a pounds 6bn deal was in the offing, dismissing it as market rumour.

City analysts, though, think differently and claim that such a deal would make perfect logical sense for Barclays, and possibly for other banks that want to penetrate the market for life assurance and pensions. Analysts believe that takeovers are a way of overcoming slow organic growth in life assurance and pensions markets.

Barclays is known to be looking to buy into the life insurance sector as one of several options for expansion by acquisition. The recent announcement that a large part of BZW, its investment bank, is being sold has heightened speculation of a takeover bid.

Lloyds TSB, one of Barclays' main rivals in the high street, has also announced its interest in buying a life insurance group if it would add value to the bank's operations. Lloyds has since been linked with Norwich Union, and separate takeover talks have also taken place between NatWest and Prudential.

The takeover activity stems from the desire of high street banks to move away from the low-margin business of taking deposits to selling more profitable savings and investment products. For the UK clearing banks, income from traditional sources such as loans and overdrafts has been slowing for some time.

But analysts say sales by high street banks of own-brand life insurance and pensions products have slowed to a stop following the successful foray into the business eight years ago. Figures from the Association of British Insurers show that banks' share of the life and pensions market, which grew to 12 per cent by 1994, has now hit a wall. In 1995 and 1996, the share slipped to 11 per cent.

Roman Cizdyn, insurance analyst at Merrill Lynch, said: "Organic growth hasn't worked. The figures showing sales of life insurance and pensions are very, very disappointing for the bancassurers."

Legal & General is already valued at pounds 6bn on its 499p share price which, analysts claim, is well below the level that Barclays would have to pay. They reckon the bank would have to offer an expensive, and possibly unjustifiable, premium of around 20 per cent.

At UBS, Chris Hitchings, an analyst, said: "In principle it's the right thing to do. But life insurance is about brand and distribution. Barclays have the distribution already. And to a retail investor, Barclays is just as powerful a name as Legal & General, so it's hard to see what value would be added."

James Dean, Price Waterhouse insurance group partner, said: "There is a view that, in a few years' time, there will be a number of very large financial services supermarkets in this country. And no-one wants to be left behind."

Other analysts do not subscribe to the theory that there will be a rapid round of takeovers which would accelerate the consolidation process witnessed over the last two years in the life insurance sector.

That picture is now becoming blurred by the entry of newly converted building societies to the banking sector. Recent speculation has linked Halifax with the Prudential, Legal & General with Norwich Union as well as Barclays, while Northern Rock is said to be on National Westminster's shopping list.