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 synergies once 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.

Not convinced 

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. There’s no guarantee that it’ll 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 Aviva’s organic rate of growth. Indeed, after trawling through Aviva’s 2014 results release and stripping out one-offs, the company’s IFRS operating profit for 2014 missed expectations by 10%. Far from rising 6%, after stripping out one-offs, the company’s 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 group’s 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.

The post Why The City Hates Aviva plc’s Deal With Friends Life Group Ltd appeared first on The Twelfth Magpie.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

In this article, I’ll explain what’s driven these impressive gains, and ask whether shareholders should now lock in their gains, or hold on for more.

International Consolidated Airlines

Shares in IAG have risen by 47% over the last six months and the firm, which owns British Airways and Iberia, had a stonking year in 2014.

Passenger capacity rose by 9.3% and revenue rose by 8.0%, driving an 80% increase in operating profit before exceptional items. IAG also benefited from the falling price of oil: fuel costs fell by 7.8% during the year.

IAG expects operating profits to rise by around 60% to more than €2.2 billion in 2015. Current forecasts give IAG shares a fairly modest 2015 forecast P/E of 12.0 — I’d be tempted to hold on for more.

Friends Life Group

Friends Life’s share price really took off when Aviva made a bid for the firm in November. The all-share deal meant that the value of Friends Life shares became pegged to those of Aviva.

I sold my Friends Life shares soon after the bid was announced, but this has proved to be a missed opportunity: Aviva shares have risen by 8% since then, while Friends Life shares have done even better, rising by 13%.

However, if you don’t want to end up owning shares in Aviva, you might want to think about selling quite soon, as the last day of dealing for Friends Life shares is 9 April.

Barratt Developments

Housebuilder Barratt has taken the number three slot behind IAG over the last six months, gaining around 35%, thanks to a 12.5% increase in completions, and a 75% rise in pre-tax profits over the period.

Barratt shares now offer a 2015 prospective yield of 4.4%, rising to 5.5% in 2016.

However, while it’s impossible to know when the housing market will peak, several housebuilders have already flagged up slowing sales growth and rising land, labour and materials costs.

Barratt shares now trade at nearly twice their tangible book value, and have risen by 350% over the last five years — compared to a gain of only 200% between February 2002 and 2007. The income remains attractive, but I’d be tempted to take some money off the table.

The post Is It Time To Take Profits On The FTSE 100’s Top 3 Risers: International Consolidated Airlines Grp, Barratt Developments Plc & Friends Life Group Ltd appeared first on The Twelfth Magpie.

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• 2 cheap FTSE 100 stocks that have P/E ratios below 10
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Roland Head owns shares in Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Pension reforms 

Last year’s pensions reforms completely changed the UK’s life assurance market, and annuity sales slumped in the months following the overhaul. Friends Life did not escape unscathed.

Falling income at the group’s UK retirement income business hit operating profits during the first half of last year. Operating profits for the period fell 7%, from £171m to £159m, and Friends Life faced calls to spin-off or divest its retirement income business as a result.

Nevertheless, there’s more to Friends Life than just annuity sales, but Aviva’s target is the potential cost savings and merger synergies that can be achieved from the deal. In particular, Aviva’s management is planning to produce £225m a year in cost savings once it acquires Friends Life, while there will also be increased benefits to customers as lower costs allow the enlarged group to offer more for less.

Merger and integration costs are set to total £350m, of which £200m will be incurred next year. As part of this plan, Aviva’s management has stated that the group may cut as many as 1,500 jobs by the end of 2017.

Hopefully the size of the enlarged Aviva will attract customers seeking security, as the merged entity will have greater financial firepower than either standalone company. This should increase sales.

Additionally, Aviva’s cash generation will increase after the deal and the company will be able to pay down debt at an accelerated rate — the all-stock nature of the transaction means that the merger will not have an effect of Aviva’s debt level. Friends Life shareholders will own 26% of the enlarged company.

Slow growth 

Unfortunately, despite cost savings and an improved product offering from the combined Aviva/Friends Life company, City analysts don’t expect the deal to have much impact on the group’s earnings going forward. For example, they have pencilled in 2016 earnings per share of 55p for the enlarged group. This forecast is only 17% higher than the figure Aviva is already expected to report for full-year 2014.

Still, projected EPS of 55p for 2016 indicate that Aviva is currently trading at a 2016 P/E of 9.3, significantly below Aviva’s peers in the life insurance sector, which currently trade at an average P/E of 16.

Based on this figure, if Aviva’s shares moved to trade in line with peers by 2016, the shares could be worth up to 880p by 2016. If the company’s deal with Friends Life goes smoothly. 

The post Will Aviva plc’s Acquisition Of Friends Life Group Ltd Help The Company Return To 850p? appeared first on The Twelfth Magpie.

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• 3 top passive income shares to consider with dividend yields above 5%
• How much do you need in a SIPP to target a stunning £750.75 weekly passive income?
• How to turn a £20k ISA into a £12,000 yearly second income
• Starmer resigns as PM — what could this mean for UK stocks and the FTSE 100?

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

But some investors are unsure about the benefits of the deal. Specifically, Capital Group is one of the world’s largest asset managers and had been one of Aviva’s largest shareholders… until the deal was announced.

At one point Capital held 3.9% of Aviva’s outstanding shares, worth around £560m at current prices. However, a few days after the deal with Friends was announced, Capital reduced its holding to 1.2%. There’s no other reason to explain why the asset manager would make this sudden change, unless it was worried about the merger.

Some support 

Still, other institutional investors have signalled their support for the deal but some analysts are worried. In particular, City analysts are worried about Friends’ exposure to the UK’s life assurance market, as well as the impact this year’s pensions reforms will have on the company’s outlook.

While it’s true that a combined Friends-Aviva company will be able to compete more effectively in a shrinking market, falling annuity sales will be a thorn in the side of the group.

Most of the growth from the deal, in the near-term at least, will come from merger synergies. Aviva’s management is planning to produce £225m a year in cost savings once 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.

And hopefully the size of the enlarged Aviva will attract customers seeking security, as the merged entity will have greater financial firepower than either standalone company. Aviva’s cash generation will increase and the company will be able to pay down debt at an accelerated rate — the all-stock nature of the transaction means that the merger will not have an effect of Aviva’s debt level. Friends Life shareholders will own 26% of the enlarged company.

The bottom line 

Overall, the fact that Capital has sold a portion of its Aviva shareholding is concerning. It seems as if the asset manager is worried about Friends’ exposure to low-growth markets.

Nevertheless, the deal between Aviva and Friends has many benefits, the most important of which is the enlarged group’s size and financial firepower. Cost savings should also help drive growth in a low growth market. 

The post Is Aviva plc Making A Mistake By Acquiring Friends Life Group Ltd? appeared first on The Twelfth Magpie.

More reading

• A £10,000 ISA buys 1,931 shares in these 6.5%+ yielding dividend stocks!
• 3 top passive income shares to consider with dividend yields above 5%
• How much do you need in a SIPP to target a stunning £750.75 weekly passive income?
• How to turn a £20k ISA into a £12,000 yearly second income
• Starmer resigns as PM — what could this mean for UK stocks and the FTSE 100?

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.