£19bn merger of CGU and Norwich Union could trigger bids from rivals

CGU and Norwich Union will announce plans for a £19bn merger today that will create Britain's largest insurer and the fourth largest in Europe.

CGU and Norwich Union will announce plans for a £19bn merger today that will create Britain's largest insurer and the fourth largest in Europe.

The deal will see 4,000 job cuts, including 1,000 at Norwich Union's head office in Norwich. The company is the Norfolk city's largest employer.

City analysts have already questioned the deal which was widely leaked at the weekend. Critics say the strategy is unclear and the merger could be broken up by rival bids from major European players such as Allianz of Germany.

Chris Hitchins, insurance analyst at Commerzbank, said: "I don't think this is a marriage made in heaven. The question I would have for Bob Scott [chief executive of CGU] is how does this advance his strategy? CGU is big in the UK. Their ambition was to do the same in Europe. This merger brings more exposure to the UK and more exposure to non-life insurance." Mr Hitchins said CGU should have bought a life insurance company in Italy, Germany or Spain. He tipped Allianz as a potential bidder for CGU, with Norwich Union also looking vulnerable.

Spokesmen for CGU and Norwich Union disagreed, saying that rival bids were unlikely, as an overseas player would not be able to match the synergies of the two British groups, which have been estimated at £200m a year within three years.

There may also be regulatory concerns over some aspects of the deal. The merger will give the combined group 19 per cent of the UK general insurance market. The life insurance side of the business will be less of a problem, with the two companies accounting for 9 per cent of the total UK market.The two companies said both markets were fragmented enough to satisfy the competition authorities.

The merger will create a new insurance giant, leapfrogging the Prudential, which has been Britain's leading insurer for more than a a century. The new company will have with premium income of more than £25bn and over £190bn of funds under management. The strategy is to use greater scale to drive down costs and use the powerful domestic base as a springboard for expansion into the pensions and life business in Continental Europe.

At the same time, the group plans to scale back business in the risky and less popular general insurance market and will put CGU's US general insurance operation up for sale in a deal that is expected to raise more than £1bn.

The deal will be structured as an all-share nil premium merger based on the relative valuation of the group. On Friday's closing prices that would give CGU shareholders 55 per cent of the new business with Norwich Union investors accounting for 45 per cent.

The merged group, whose name is to be revealed today, will be based in London. Although around 1,000 jobs will be lost in Norwich, it is understood that there will be no cuts at Perth the former head office of General Accident.

This is because of the terms of an agreement made when Commercial Union merged with General Accident two years ago.

The combined group will be the fourth largest insurer in Europe behind Axa of France, Allianz of Germany and Generali of Italy. CGU has been advised by Goldman Sachs. The deal, which was agreed by both boards on Friday, was codenamed "Project Albert". Norwich Union has retained Dresdner Kleinwort Benson.

The board structure of the new group has already been agreed. CGU Chief Executive Bob Scott will head the new combine until his retirement next year, when Norwich Union's Richard Harvey will take the helm.

CGU's Chairman Pehr Gyllenhammar will chair the new group with Norwich Union's George Paul as deputy.

CGU's Peter Foster will be finance director, with Norwich Union's finance director Mike Biggs taking over the general insurance operations. Philip Scott of Norwich Union will be head of the combined life insurance business.

Norwich Union, which de-mutualised in 1997 and came to the stock market in the same year, has been seen as too small to survive as the insurance industry consolidates.

The deal will increase the pressure on Royal & Sun Alliance which has long been regarded as a takeover target.