Insurance rivals plan £8.3bn merger

Friends Provident, the FTSE 100 life insurer, looks set to become the focus of a bidding war this summer, with the group set to confirm today that it is in merger talks with its rival Resolution.

Rumours of the negotiations leaked out over the weekend, with the pair expected to issue statements this morning confirming that they are in discussions. However, Resolution is unlikely to get a clear shot at Friends, with several of its UK competitors - such as Aviva and Standard Life - likely to consider a counter-bid for the group.

Axa, which already owns a 15 per cent stake in Friends, and has openly admitted its ambition to become the second-largest player in the UK's long-term savings market, is also highly likely to consider a bid for the company. The private equity group JC Flowers is another party which is believed to have been mulling a bid for Friends in recent months, and may be tempted to take part in an auction.

A deal between Resolution and Friends would create Britain's fourth largest quoted UK life company, overtaking Standard Life and leaving the merged entity only £1bn smaller than third-placed Legal & General.

It is thought the talks are at an advanced stage, with the pair believed to be working towards a nil-premium merger.

Friends Provident would be a good fit with Resolution, bulking up its UK life insurance assets, while also giving it its first major foothold outside the UK, through Friends' fast-growing Lombard business. Friends also owns a majority stake in the quoted asset management group F&C, which could potentially be merged with Resolution's Glasgow-based fund management business.

It is thought that if a merger between Resolution and Friends were to go ahead, Resolution's founder, Clive Cowdery, would insist on remaining chairman. Although both Mike Biggs, the chief executive of Resolution, and his opposite number at Friends Provident, Phil Moore, are both relatively new to their positions, it is understood that Mr Biggs, a former finance director of Aviva, would take the top executive position in the new company. Mr Moore took up his new position on 1 January, replacing Friends' long-standing chief executive Keith Satchell. Mr Biggs took over as chief executive when Paul Thompson unexpectedly left Resolution in March this year. Both were formally finance directors of their respective companies.

Resolution has grown exponentially over the past few years, completing sizeable deals every year since its formation in 2003. Its first major deal was the acquisition of Royal & SunAlliance's closed life fund in 2004, moving on to merge with Britannic Asset Management the following year, and to buy Abbey National's closed life funds in 2006. Mr Cowdery invested £500,000 of his own money to start the business. His stake is now worth almost £130m.

Prior to its acquisition of the Abbey life business last year, Resolution had focused on running closed books of business. It is now writing an increasing amount of new business, sold through Abbey's 700-strong branch network. It is also cross-selling products to investors in its closed funds.

Shares in Resolution have traded sideways this year - remaining between 600p and 700p. Friends' shares have slipped 15 per cent, partly driven by troubles at F&C, which has lost a number of investment mandates due to poor performance over the past two years. Resolution closed at 629p on Friday, giving the company a market value of £4.31bn. Friends closed at 186.4p, valuing the company at £4.0bn.