Avivas(LSE: AV) decision to buy peerFriends Life(LSE: FLG) was supposed to mark the beginning of a new chapter for the former. However, few believe that the deal will improve Avivas fortunes, and some are now openly criticising Avivas decision.
In fact, nearly every City analyst has raised doubts about the deal, which is expected to be approved by shareholders later this month. Many are concerned about Friends exposure to the UK annuity market, which has been shaken up by the new pension rules expected to come into force in April.
Since the Chancellor announced that these rules would come into forced, new annuity sales have fallen by 16% and 15% at Friends and Aviva respectively.
Still, Aviva believes that it can drive 225m a year in cost saving synergiesonce it acquires Friends, while there will also be increased benefits to customers as synergies flow through.
Merger and integration costs are set to total 350m, of which 200m will be incurred next year. Aviva itself is planning to cut a further 1.8 of costs out of its own business.
On paper the numbers appear to make sense, but the City is not convinced. Neither Friends nor Aviva has a good record of being able to seamlessly integrate acquired businesses. Theres no guarantee that itll be any different this time.
But the most importation question analysts are asking is: why exactly does Aviva want to do the deal in the first place?
Aviva is halfway through a huge turnaround plan, and many analysts believe that there are bigger issues that the company needs to deal with first, before making such a large acquisition.
Two key issues as improving regulatory compliance across the group and improving Avivas organic rate of growth. Indeed, aftertrawling through Avivas 2014 results release and stripping out one-offs, the companys IFRS operating profit for 2014 missed expectations by 10%. Far from rising 6%, after stripping out one-offs, the companys operating profit actually contracted by 6%.
Moreover, some analysts have gone so far as to call this deal a rights issue in disguise as Aviva will issue stock to finance the deal. Further, Aviva requires the extra cash the merged entity will generate in order to reduce gearing.
Concern has also been raised about lack of international diversification Aviva will have once the deal completes.Sure, the combined Aviva-Friends will be a forced to be reckoned with in the UK insurance market. However, the groups international presence will be limited meaning that the enlarged group will be reliant on UK growth to maintain revenue expansion.
Only time will tell
Of course, Aviva could prove all of its doubters wrong, but only time will tell if the company is making a big mistake by acquiring Friends.
Still, as always, I strongly recommend that you do your own research before making any trading decision — you may come to a different conclusion.
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