Investors give Friends Provident restructure plan a rough reception

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The Independent Online

Friends Provident finally unveiled its restructuring plan yesterday but the proposals immediately received a tough reception from investors who sent the life insurer's shares down to their lowest level for more than three years.

The company, which is without a chief executive, effectively put its F&C Asset Management, Lombard and Pantheon businesses up for sale as it scrapped a plan to expand in wealth management. It said it would roughly halve its total dividend payout this year and warned that pre-tax profit for 2007 would fall to about £20m from £509m in 2006.

The insurer surprised analysts with a charge of £160m for lapsed policies and another for £280m in corporate and development costs. It also said it would cut about 600 jobs to reduce costs by at least £60m by the end of 2009. Sir Adrian Montague, the chairman, said the company would be able to make some of the cuts from regular staff turnover but warned there would be compulsory redundancies. The gloomy news pushed the company's shares down more than 10 per cent to 138.8p, their lowest since November 2004.

"People are clearly sobered by the fact that we are reducing the overall dividend," said Sir Adrian.

Even though the company's new business plan excludes F&C, Lombard and Pantheon, Sir Adrian denied they were explicitly up for sale. He said there were a number of options available for the businesses but declined to go into details.

But Alain Grisay, the chief executive of F&C, said one of the options for his business would be a management buy-out. F&C has appointed Lazard and Lexicon Partners to advise it. Friends Provident owns 52 per cent of F&C, a stake that is now worth about £500m. The second-biggest stake in the company is owned by the Dutch financial group Eureko. F&C has about £100bn of funds under management.

Friends Provident started the review in November after its merger with Resolution, the closed fund manager, was gatecrashed by Hugh Osmond's Pearl Group, which agreed to buy Resolution. The company ousted its chief executive, Philip Moore, in November. It named Trevor Matthews as its new chief executive on Tuesday after luring him from rival Standard Life. But it will have to wait until July for Mr Matthews to come on board if Standard Life insists on him serving out his contract, as the Edinburgh-based insurer has so far insisted it will do.

Sir Adrian said that any capital proceeds from the restructure would be returned to shareholders.

He said the company's business model had run into trouble in the past year because the slowing housing market had caused a drop in high-margin, quick return protection policies while Friends Provident had increased sales of low-margin, long-term corporate pensions. This changing mix put a strain on the company's capital position.

Friends Provident scrapped plans in August to raise about £500m to finance growth and hired Goldman Sachs to come up with alternatives in December. The new plan will see the company concentrate on pensions and protection and ditch plans to expand in wealth management. It will not need to seek new capital, said Sir Adrian.

He added that he hoped decisions on the three businesses' fate would be reached by the summer. But in the meantime, Friends Provident may have to fend off a bid from private equity interests. JC Flowers, the private investment firm that considered bidding for Northern Rock, said last week that it was considering an offer after building a 2.7 per cent stake in the 176-year-old insurer.

Sir Adrian said the board would put any good offer to shareholders and that no such proposal had been received. JC Flowers is likely to take its time in digesting the new information released yesterday. The insurer now plans to focus on profitable business in the UK, though it said yesterday that it last year suffered a "cash loss" on sales of low-margin group pensions.

New business will be less "in the short term" than in 2007 as the company becomes "more disciplined" in writing new business.

Friends Provident bought Lombard for £404m in 2005 to expand its international operation and expand its business for wealthy clients in Europe.

Pantheon is a financial adviser that Friends bought last year for £16.8m. Analysts have estimated Lombard could now be worth about £900m.