Prudential offers pounds 1.9bn for ScotAm

Scottish Amicable finally admitted the defeat of its two-stage flotation plans yesterday after Prudential stepped in to offer pounds 1.9bn for the company, trumping an earlier pounds 1.4bn bid by Abbey National.

The Pru's bid terms offer pounds 400m in cash or shares, plus pounds 400m in bonuses for ScotAm policyholders. The terms are in effect a combination of the cash offer from the Abbey, plus the mutual insurer's own bonus proposals, announced last month. Scottish Amicable said it would seek rival bids from interested parties, including Abbey National.

Charles Toner, deputy chief executive at Abbey National, said: "We have always indicated that the pounds 400m goodwill offer is a minimum level and we will in addition pay whatever is agreed to be the embedded value."

Sir Peter Davis, group chief executive at Prudential, said: "Our proposal offers Scottish Amicable policyholders the combination of an immediate payment in cash, or Pru shares, and substantial additional policy bonuses. In addition, as investors, all Scottish Amicable policyholders will benefit from Prudential's financial strength."

He said Prudential initially contacted ScotAm in January 1996 but was rebuffed. The Pru's second contact came in August last year, and was again told that ScotAm preferred to remain independent. "We have respected that and not made a hostile bid for the company. It was only after its demutualisation plans and Abbey National's bid that we decided to step in," Sir Peter said.

Analysts last night pointed to the fact that, unlike Abbey National's bid, the real cost to Prudential of its offer would only come to just pounds 250m.

Alan Richards, a director at First Marathon, the venture capital house, said: "The way it has been structured is that the pounds 1.1bn paid for the ScotAm life fund is coming from Prudential's own life fund. A further pounds 150m is coming from 'synergies' involved in merging the ScotAm and Prudential IFA operations.

"The pounds 400m in bonuses are coming from Scottish Amicable's free assets in its life fund once the fund is closed to new business. Only pounds 250m is coming from Prudential's shareholders' funds. This is a clever way of paying for the company by unlocking part of its own assets."

Roman Cizdyn, insurance analyst at Merrill Lynch, said: "The City will be pleased with the way Prudential is paying for ScotAm."

He predicted that only a handful of other companies, including AMP, the Australian life insurer, with sufficiently large life funds to enable a loan to be made for the ScotAm embedded value, might be able to emulate Prudential. AMP and Fortis, the Dutch giant, are expected to decide either way within days.

In addition to the pounds 400m cash or shares, Prudential's offer includes pounds 150m in annual, or reversionary, bonuses to policyholders. A further pounds 250m would be added to policies when they matured.

Prudential's board, which met yesterday to finalise the bid, is understood to believe that other mutual insurers will look closely at the way in which policyholders' assets are being unlocked to give better value.

The company's offer puts paid to ScotAm's own far more modest proposal of a pounds 75m bonus to policyholders, plus a further pounds 200m-pounds 400m, but only if it had managed to grow by at least 25 per cent each year for the next five years.

The plans were attacked for paying more than pounds 14m in bonuses to ScotAm directors if these targets were met.

The company said it would postpone the issue of its original circular to policyholders. But Sandy Stewart, chairman, said: "From the outset, the board has acted solely in the best interests of policyholders."

Comment, page 21