Aviva Plc share price down, agrees to purchase smaller rival to create the biggest UK insurer

Aviva Plc, Britains second largest insurer by market capitalization, lost nearly 5% of its value after it announced it had reached a preliminary deal to acquire rival Friends Life.

Last Friday, after the trading session in London ended, Aviva announced it had reached an agreement of £5.4 billion, or GBX 398.9 a share, in an all-stock deal to purchase its smaller competitor. The offered per-share price represents a 15% premium to Friends Lifes closing price on Friday and is 28% higher than its three-month average.

Under the deal, which would create the biggest insurer in the UK, Investors in Friends Life would get a 0.74 exchange ratio for each share they own. No additional information around the deal was provided.

Avivas shares fell almost 5% during the mornings session, in contrast Friends Life increased as mush as 7.5% to GBX 376.3, its biggest gain in two years, but bounced back to GBX 347.7, or a 5.4% increase for the day.

“A combination of Aviva and Friends Life would create the UK’s leading insurance, savings and asset management business by number of customers, with a stronger balance sheet and significantly higher cash flows, enhanced by substantial synergies, from which to accelerate dividend growth” Aviva said in a statement.

According to Bloomberg, should the deal close it would become the biggest among British insurers since the merger between CGU and Norwich Union, which created Aviva in 2000 and was valued at £7.4 billion.

Analysts at BNP Paribas said the agreement was a “logical transaction” due to Avivas inability to increase earnings. “Other than asset management, we do not see any revenue synergies” they wrote in a note. “The idea of selling general insurance to Friends Life policyholders in a way Aviva have failed to do so to their own policyholders is puzzling.”

“In one swoop, Aviva will consign its own cash payout restrictions to the past. In addition, there would be significant synergies from the integration of a £69 billion closed life book with Aviva’s own £124 billion UK portfolio, cross-sell potential from £2 billion p.a. of Friends Life vesting pensions, and benefits from merging the investment portfolios” said James Shuck, an insurance equity researcher at UBS.

Aviva Plc gained 1.22% on Friday and closed at GBX 539.00 in London. On Monday the stock dropped 5.10% to trade at GBX 511.50 at 12:19 GMT, marking a one-year increase of 19.20%. The company is valued at £15.89 billion. According to the Financial Times, the 19 analysts offering 12-month price targets for Aviva Plc have a median target of GBX 580.00, with a high estimate of GBX 650.00 and a low estimate of GBX 443.00. The median estimate represents a 7.61% increase from the last close price of GBX 539.00.