The Norwich Union owner Aviva said today it was unwilling to table a hostile bid for Prudential despite having a £17 billion proposal knocked back by its rival's board.
Shares in the Pru rocketed by more than 12% to stand above the 708p level that Aviva was willing to pay in an all-share deal as investors pinned their hopes on a higher bid by its UK rival or the entry of European competitors such as Axa into the fray.
A combination of the Pru and Aviva would create the world's fifth largest insurer, with a market value of £36 billion and income from premiums of around £40 billion.
Aviva approached its rival on Thursday but saw its overtures rejected by directors of the Pru who refused to enter talks.
Outlining its terms today, Aviva boss Richard Harvey said there was "a compelling strategic, financial and operational logic" for a tie-up but his company was only prepared to proceed with its proposal on a recommended basis.
"This is a real opportunity to create a leading player in the global savings, investments and insurance market," Mr Harvey said.
"The group would have a significant presence and growth opportunities in Europe, Asia and the United States. This is a value-creating proposition for the shareholders of both companies."
Around 42% of operating profits of the combined group would be made in the UK, with 28% coming from Europe, 17% from North America and 10% in Asia.
Savings of £320 million had been identified with around half of this sum coming from a shake-up of its life and pensions business in the UK where the enlarged group would be the largest life assurer, making £456 million profits on £2 billion sales of new business.
Aviva added that the addition of the Pru's distribution and customer base in the UK general insurance market would help accelerate the growth of Norwich Union and the RAC motoring organisation.
Despite the rise in Pru shares - equivalent to £1.87 billion today - analysts said Aviva faced a battle to convince the City of the merits of a deal.
In particular, they questioned why shareholders would want to create a business that would be less focused on Asia and the United States than the Pru is currently.
Robin Savage, an analyst at Panmure Gordon, said: "We expect Prudential's management will be able to convince investors that its independent future is more attractive than the possible cost savings on offer."
But he added: "Other FTSE 100 life companies would be less able to convince investors of the need to maintain independence."
The emergence of Prudential as a takeover target sent shares in a host of rivals higher, with Legal & General rising 4% and Friends Provident and Royal & Sun Alliance gaining 3% each.
Farooq Hanif, of broker Credit Suisse, said the move by Aviva could flush out bids from other insurers for Prudential because of its attractive Asian life insurance business.
He said: "It is possible that other insurers could extract greater potential synergies from a merger with Prudential than Aviva could."
Any offer pitched at around 700p would undervalue the Pru and justify the opposition of its board, he added.
Richard Hunter, head of UK equities at Hargreaves Lansdown, said: "Clearly the market believes that the initial approach at 708p is too light, although early indications from Aviva imply that they believe this is a reasonably full price.
"Nonetheless, in the absence of a higher offer, there will not be much progress."
Prudential, which last week reported that annual operating profits rose by a third to £1.71 billion, stuck by its decision to reject the "unsolicited and unwelcome" proposal from Aviva.
Sir David Clementi, chairman of Prudential, said: "Last week's strong results demonstrate the positive momentum of Prudential's businesses and the exciting prospects evident under our new management team.
"The potential of our high growth, high margin businesses is tremendous and distinctive.
"A combination with Aviva would dilute the benefits of this growth for our shareholders. The board does not believe the proposal is in the interests of Prudential shareholders."Reuse content