Company in the news: Aviva

Aviva has made a play for life insurer Friends Life. Phil Oakley explains what investors should do next.

So Aviva (LSE: AV) has decided to buy UK life insurance company Friends Life (LSE: FLG). Instead of paying cash, it is offering 0.74 of its own shares for each Friends Life share, valuing them at 374p each. The key question is: does this deal stack up for both sets of shareholders?

If Friends Life shareholders choose to sell up, they're getting a decent uplift compared to where the shares were trading before the deal. But some are more sceptical about what Friends Life does for Aviva.

Unsurprisingly, Aviva's management is bullish, saying the company can save £225m in annual costs and boost cash flow by £600m in the future.

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The deal also gives them five million extra customers to sell more products to, while the all-share deal will strengthen Aviva's financial position.

On top of this, Aviva plans to ramp up its dividend payments to shareholders by raising the payout from 35% of profits to 50%.

But combining two business is always easier on paper than in practice. Time will tell, of course, but given the risk, Aviva shares don't look that cheap right now on a price-to-book-value ratio of 1.7 times and a yield of 3.3%. Buying Friends Life may pay off handsomely, but I wouldn't chase the shares.

Verdict: hold

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

 

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

 

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for Moneyweek in 2010.

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