A spurned offer to merge Prudential P.L.C. into Aviva P.L.C. has analysts parsing both the transaction and the possible next step as well as assessing the European life insurance market.
On March 16, Aviva proposed a stock merger valued at ?17.1 billion (U.S. $29.9 billion). The combination would use a ratio of 82 new Aviva shares for every 100 Prudential shares, a 10% premium for Prudential shareholders. The transaction, Aviva said, would result in ?320 million (U.S. $560 million) in annual before-tax savings.
Prudential has an international presence in Asia and the United States and is the parent of Jackson National Life Insurance Company, Lansing, Mich. Aviva has a strong presence in Europe.
Aviva says 62% of its net premium is in the United Kingdom, 23% in continental Europe and 15% in the rest of the world.
Prudential says that of a total ?1.85 billion in insurance sales in 2004, ?800 million in sales were from operations in the U.K. and Europe; ?450 million in the U.S.; and ?575 million in Asia. That breakout would be roughly 44% in the U.K. and Europe, 25% in the U.S., and 31% in Asia.
The combined market value of the two entities, which some are calling 'Pruviva,' would total approximately ?49 billion and rank fourth worldwide, according to a chart in a Sanford Bernstein report using Bernstein and Bloomberg data. "Pruviva" would fall behind ING, AXA and Allianz (see chart).
But, Prudential P.L.C. says this is not going to happen with the Aviva proposal. In a statement, Prudential's chairman, Sir David Clementi, states Prudential's recently released results suggest good growth potential for the company. A combination, he asserts, would dilute that growth.
Analysts are trying to assess the current status of both companies.
"Aviva certainly has been looking to build a presence in the U.S.," says Cynthia Crosson, director, Fitch Ratings, New York. Currently, the operations in the U.S. are small and it needs to build a presence here, she continues.
Fitch says in a statement that any merger between Aviva and Prudential could result in changes to their ratings with potential downward pressure on Prudential's ratings and potentially positive ratings on Aviva. The ultimate ratings would depend on a full analysis of the combined company, Fitch says.
"Historically, the Aviva group has been very successful in executing mergers," says Sanjeev Shah, a Fitch director in London. "However, if a potential bid for Prudential were successful, this would be Aviva's biggest merger to date and would, therefore, also be the most complex to integrate."
