(RTTNews) - Early Wednesday, U.K-based manager of life insurance funds Resolution Plc agreed to acquire Abbey National Plc's (ANB-PB) life insurance businesses for £3.6 billion, which would initially be financed by a rights issue of about £1.54 billion and new debt facilities. Separately, Resolution has also signed long term distribution agreements with Abbey.

Resolution noted that Abbey's life insurance units include Scottish Provident, Scottish Mutual Assurance and Abbey National Life, which manage about £29 billion. The embedded value of the units, a measure of their worth, is about £3.77 billion.

Francisco Gómez-Roldán, Abbey's Chief Executive, said, "Through this deal, we now have a partner in Resolution whose core focus is managing life businesses allowing us to put all our efforts into building our banking business in the UK. The distribution agreements will provide continuity of service and products to our customers and we also have a great opportunity to bring our range of retail banking products directly to Resolution's customers."

Subject to customary closing conditions, the transaction is expected to close on 1 September 2006. The gross purchase price of £3.6 billion would decrease at a rate of 5% per annum, if completion occurs before 1 September 2006, and it would increase at a rate of 5% per annum if the transaction closes after 1 September 2006.

Resolution would pay a break fee to Abbey equal in value to the lesser of £36 million and 1% of Resolution's market capitalization at the time of payment.

Financial Benefits

Resolution expects the acquisition to enhance its pro forma Market Consistent Embedded Value (MCEV | charts | news | PowerRating) per share by 8.2% as at 31 December 2005. Resolution also expects the deal to be accretive for MCEV earnings per share from the first full financial year following completion.

In addition, subject to the anticipated restructuring of some of the companies and funds comprising Abbey's Life Businesses, the acquisition is expected to enhance dividend capacity. Resolution's current dividend policy of 13% per annum target growth rate to 2009 would be reviewed in light of the acquisition at the time of the interim results in September 2006.

The enlarged Group is estimated to provide pre-tax cost synergies of about £10 million annually by the end of 2008 and asset management operational synergies of about £7 million in 2007. The combined net present value of these synergies, post-tax, at a 12% discount rate, is expected to be approximately £64 million.

Additional financial and capital synergies with a net present value, post tax, at 12% discount rate, of approximately £114 million are expected to be realized over time.

Apart from this, the Abbey deal would boost Resolution's assets under management by 72% to about £63 billion.

As of 31 December 2005, Resolution's total funds under management and reflecting the internalization of the Phoenix Life Group assets, were £38 billion, including about £3 billion of third party funds. For the same period, total life company invested assets of Abbey's Life Businesses are about £26 billion.

Future strategic positioning

Resolution believes that the acquisition would better position the company for future transactions, affording it the opportunity to absorb the new business capabilities of potential sellers of in-force life businesses.

Financing

The acquisition would be financed by a fully-underwritten rights issue and new debt facilities.

Resolution estimates to generate gross proceeds of about £1.54 billion from this rights issue, which is to be issued at a price of between 440 pence and 520 pence per share. The company proposed to issue up to 350.0 million shares at an issue Price of 440 pence a share representing about 96.6% of Resolution issued share capital.

The number of issued shares would shrink to 296.6 million and 81.8% of Resolution share capital, if the shares were priced at 520 pence.

Rights issue would be on the bases of 28 shares per existing 29 shares if issued at the minimum price of 440 pence a share and 9 shares per 11 existing shares, if issued the maximum price of 520 pence per share.

The debt facilities include a short-term bridging facility of up to £1.75 billion (and new debt facilities of £550 million.

Distribution Deals

Resolution also signed various distribution agreements with Abbey. As a result, Abbey would distribute through its retail network Abbey-branded life and pensions products manufactured by Resolution.

Abbey would continue to be the exclusive distributor of Scottish Provident protection products to intermediaries and Abbey has secured exclusive access to provide retail banking products to the Enlarged Group's estimated 7 million customers.

Stock Quote

Resolution shares are currently up 4.14%, while Abbey shares are currently down 0.14%, both on London Stock exchange.

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