British insurer Resolution has agreed to buy the life business of Abbey bank for £3.6 billion (€5.2 billion) in a deal that will double its size and propel it into the FTSE 100 blue-chip share index.
Resolution, the sixth-largest listed UK life insurer with a market value of almost £2.5 billion, said it would fund the deal with a £1.54 billion rights issue and debt, as well as £1.5 billion of surplus capital within Abbey's life businesses.
The deal will cement Resolution's position as the biggest UK life insurance industry consolidator, giving it 7 million customers with invested assets of £63 billion.
"This transaction substantially increases the scale of Resolution's business and delivers on our stated consolidation strategy," chairman Clive Cowdery said in a statement.
"We see the prospect of further value enhancing acquisitions in the life sector, leveraging our significant scale advantages, new product capabilities and track record of delivery."
"They appear to be paying about embedded value, with not much for the new business, which looks fine," said analyst Kevin Ryan at ING in London.
"The Resolution management gets very high ratings, but whether they have the management further down and the breadth to cope with this I don't know," he said.
The rights issue will be priced between 440 and 520 pence. Shares in Resolution closed at 676p yesterday.
Resolution said it expected to achieve annual pretax cost synergies of £10 million by the end of 2008 from the deal.
Abbey's life business - which includes Scottish Mutual, Scottish Provident and Abbey National Life - marks a shift away from Resolution's focus on closed life funds, as the portfolio includes both closed books and funds still writing new business.