Aviva in talks to buy Friends Life for £5.6bn

Friends Life sponsors T20 cricket

The insurance giant Aviva is in talks with rival Friends Life over a £5.6bn takeover that is set to change the landscape of Britain’s pensions industry.

The deal is a bold move by Aviva’s chief executive, Mark Wilson, who has led a radical overhaul of the FTSE 100 company since taking the helm at the start of last year.

In a statement last night, Aviva said that although the negotiations were at an early stage, it had agreed to pay Friends Life investors 400p a share – a 15 per cent premium on Friday’s closing price of 347.7p.

“The board of Aviva believes that the combination would create the leading insurance and savings business in the UK with 16 million customers, who stand to benefit from being part of a stronger and more diversified group with a wider product range,” the company said in a statement.

“In line with Aviva’s ‘true customer’ composite strategy, Friends Life’s 5 million customers will benefit from Aviva’s product offers in general insurance, health, and asset management, as well as life insurance.”

The move has already raised eyebrows in the City because Aviva is part of the way through a recovery plan following years of underperformance under its former chief executive, Andrew Moss. He was ousted by shareholders in June 2012 following an embarrassing revolt over pay.

Friends Life was created by the entrepreneur Clive Cowdery, who merged Friends Provident with parts of Axa and Bupa.

The company has struggled in recent months: its operating profits fell 7 per cent to £159m during the first half of the year and new business sunk 24 per cent to £65m.

Earlier this month its chief executive, Andy Briggs, told The Independent that consolidation across the sector was likely to be held back by industry reforms, including those announced by the Chancellor, George Osborne, in March’s Budget.

These changes handed more freedom to pension savers and will mean that, from next April, retirees will no longer have to buy an annuity when they stop work.

The company recently agreed to sell its wealth advisory arm, Lombard, to the private equity firm Blackstone for £317m. The proceeds will be handed back to its investors.

Aviva said Friends Life’s board had agreed to recommend the deal to its shareholders, but added that it was still looking through the books as part of the due diligence process. If completed, the deal will boost Aviva’s underperforming fund management division.

“The transaction is also expected to lead to a substantial increase in profits and assets under management at Aviva Investors through the addition, over time, of Friends Life’s UK assets under management,” the company said.

It added: “The combination with Friends Life would deliver significantly higher cashflows enhanced by substantial synergies, principally through operating efficiencies in the combined back books and the removal of overlapping overheads.”

The deal, which will need to be sanctioned by both sets of shareholders, would represent one of the biggest shake-ups in the industry since the merger of CGU and Norwich Union almost 15 years ago that created Aviva.