Comment: Money talks in Aviva Friends Life marriage

Martin Flanagan
Martin Flanagan
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THERE’S not far to look for the upfront benefits of Aviva’s £5.6 billion all-share takeover of rival Friends Life. It bolsters Aviva’s financial position by what may pass for “holistic” strategy in the City – buying in Friends’s £600 million annual cash-flow and shaking out £225m of annual cost savings by the end of 2017.

That should help a recovery in the dividend for Aviva’s long-suffering shareholders, although, to be fair, greater clarity and drive has been injected into the insurer since Mark Wilson took over at the helm from the hapless Andrew Moss two years ago.

Wilson had already been repairing Aviva’s balance sheet by restructuring, selling businesses and cutting costs, including only modest rises in the divi as institutional investors have taken a lot on trust in the continuing turnaround story.

The Friends acquisition is a step-change, however, even if it comes with the risk of all major mergers of execution risk in the integration.

It is probably simplistic to believe George Osborne’s seminal changes to the pensions regime in his last budget, removing obligations for people to buy an annuity on retirement, was a catalyst for the takeover.

But neither are those changes likely to have stiffened the target’s resolve to plough its own furrow as an independent operator.

When times get tough it is the slim that grow thin, while the fat get slimmer. An Aviva/Friends combination gives scale to fend off tougher times in pensions, and there is complementarity – with Friends’ increasingly important corporate pension business slanted towards bigger businesses, while Aviva is focused on smaller fry.

The cost-saving projections are chunky, but it always gives merging firms room for manoeuvre when the target date for achieving them is quite a way down the road, three years in this case.

And, anyway, big companies often outstrip their cost-saving projections, whether in mergers or restructuring; under-promising and over-delivery ­always tickles the City’s sweet spot, and who is to say it will not be the same this time.

Eamonn Flanagan, insurance analyst at Shore Capital, generated much coverage when the deal was first mooted with his dismissal of Aviva’s acquisition as “a rights issue in disguise”, buying access to the £2bn a year Friends Life generates from its core pensions business.

That might be overcooking it a ­little, because there are no accompanying merger synergies from a straight cash-call on investors.

But Flanagan’s emperor’s-new-clothes-type comment cannot be dismissed out of hand. Wilson had been talking up the idea of expanding into growth markets overseas, while this merger is most fundamentally a doubling up in the UK. Cash seems the real driver, not growth.

Even so, the stock market will likely take its comfort where it can in terms of tangible financial gains, and leave strategy for another day.

Ofgem deals Royal Mail a competition blow

ROYAL Mail got a dusty response from Ofcom to its claims it’s being undermined in its UK-wide delivery remit by foreign rivals cherry-picking densely populated, profitable areas.

Ofcom has said, in effect, that such competition should incentivise the former state-owned body to be more competitive. The one crumb of comfort is a broader review of the universal service by the regulator, looking at other factors as well.

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