Friends grabs L&M for pounds 744m

News analysis: This time a mutual was predator, not prey, in the savings industry shake-up
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The Independent Online
THE SOUND of the late Freddie Mercury belting out "Another one bites the dust" must have been ringing in a fair few ears yesterday after savings and pensions group London & Manchester fell to a pounds 744m agreed bid from Friends Provident.

The takeover of L&M is just the latest manifestation of the trend towards consolidation which has seen a spate of mergers and takeovers, culminating in the pounds 2.8bn takeover by the Prudential of Scottish Amicable last year.

What is curious about yesterday's deal, however, is that this time it is not a listed company snapping up a mutual, but the other way round.

The chairman of Friends Provident, David Newbigging, insisted yesterday that a mutual was a business like any other and had just as much right to grow by acquisition - provided it could demonstrate the benefits to its owners, its policyholders.

But behind the well-honed patter about complementary distribution and economies of scale, the real motive for the deal was clear. In this kind of market, with the likes of Sir Peter Davies at the Pru and Mike Blackburn at the Halifax poised to strike at the first sign of weakness, it is - as one City analyst said yesterday - a case of "you are either predator or prey".

The knee-jerk reaction in the City was to mark the whole life sector up by 4 per cent in the hope that after this deal, takeover activity would resume.

Both the Pru and Sun Alliance, prior to its merger with Royal Insurance in 1996 are believed to have had Friends in their sights. Mr Newbigging and his chief executive, Keith Satchell, clearly do not intend to hang around and wait for the knock on the door at the dead of night.

For all its cuddly image, which its pounds 1bn ethical fund has done much to cultivate, Friends has been on the deal-making trail before. Mr Newbigging himself joined as a result of an earlier deal - the takeover in 1993 of National Mutual - while earlier this year Friends caused a minor sensation in Edinburgh's staid financial community when it acquired 63 per cent of Ivory & Sime, one of the most venerable names in that city's fund management industry, albeit much diminished in stature of late.

Whatever else it may do, yesterday's deal certainly delivers in terms of scale. With pounds 30bn under management, the group will remain in 11th position in the UK in asset terms but has substantially closed the gap on Scottish Widows ranked above it.

Some job losses are inevitable. The talk yesterday was of around 700, mainly at L&M's head office in Exeter. But the overlaps are not huge. L&M brings some corporate pensions business which Friends will want to grow and an estate agency chain which is doing useful business in the South of England.

The top brass will share around pounds 1.5m from the deal, having decided some time ago that it was pointless to swim against the tide. The savings market is expanding rapidly thanks to increasing affluence and a growing, not unreasonable fear on the part of a steadily ageing population that the state will not be there to provide for a comfortable retirement.

The Government's efforts to encourage more people to save through Individual Savings Accounts (ISAs) and stakeholder pensions ought at first sight to benefit operators like London & Manchester, which have traditionally thrived through personal contact with the poorer saver. But the harsh reality is that the old-fashioned door-to-door salesman is looking decidedly old hat in this age of phone and supermarket banking.

David Hubbard, L&M chairman, realised earlier this year that despite strong growth in its current business, in the longer term the group was too small to hold its own against the muscle of the supermarkets and the phone-based sales operations such as Direct Line and Richard Branson's Virgin Group. The group was also in a weak position after a record pounds 525,000 fine from the Personal Investment Authority for failing to act swiftly enough to deal with almost 6,000 cases of alleged pensions mis-selling.

L&M decided a while ago that although it was happy with its rate of business growth, its days as an independent company were numbered. Better to seek a suitor now, when there was a chance of remaining in control of the process, rather than later when circumstances might force its hand.

In recent months the group has talked to at least three potential bidders, including at least one from overseas. But in the end Friends was the one able to offer the price and the least painful fit.

The offer has been recommended, but it is by no means a done deal. Three of L&M's largest shareholders, Schroders, Perpetual and M&G, were consulted on Monday, and came away believing the board had done their best.

By close of trade yesterday, with Perpetual having sold its 8 per cent stake in L&M, Friends had 14.1 per cent of the company in the bag. The smart money said that a counter-bid was possible, but unlikely.