Flowers prepared to drop Friends bid: sources
LONDON (Reuters) - U.S. buyout group J.C. Flowers is prepared to walk away from takeover target Friends Provident, frustrated at a lack of contact with the British insurer's management, sources close to the matter said.
"There is no light at the end of the tunnel," one of the sources said on Friday, adding the likelihood was Flowers would walk away unless the insurer engaged in discussions.
Friends -- in the throes of a strategy review since it failed to merge with rival Resolution last year and ousted its chief executive -- last week rejected a 3.5 billion pound ($6.9 billion) cash offer from the buyout group.
It said the 150 pence-a-share proposal undervalued it and was not the basis for a discussion.
Flowers has a regulatory deadline of April 30, by which time it must either make a firm takeover bid or walk away.
Without discussions, however, Flowers and its backers will drop their pursuit of Friends, the sources said, despite a 2.7 percent stake for which they paid up to 165p a share.
The sources added Friends Chairman Adrian Montague continues to refuse contact with Flowers, and the private equity group has also had limited interaction with the insurer's advisers, Goldman Sachs and JP Morgan Cazenove.
"There is an impasse," another of the sources said. "If they are unable to have discussions, there may be no other option."
Both Flowers and Friends declined to comment.
Friends' underperforming shares fell on the news of Flowers' potential departure, dropping almost 4 percent before recovering to trade down 2.9 percent at 131.5p at 10:19 a.m. EDT.
SCOPE FOR MORE
But analysts said Flowers was seen to remain interested and had scope to pay more, having last year offered to hold talks based at around 175p a share before Friends unveiled 440 million pounds of charges that all but wiped out its 2007 profit.
"On balance, it wants to buy Friends, otherwise it would just pull out today," Pali International analyst Marcus Barnard said. "Flowers also wants to buy it as cheaply as possible -- threatening to pull out puts pressure on the share price, on shareholders and on management to talk to him."
Flowers, however, has shown little appetite to increase its offer, saying this week it plans to seek regulatory permission to offer a price below 165p -- the highest price paid for the shares -- in part due to the share-price drop.
One of the sources said Flowers saw its 150p per share as a "very reasonable cash premium in the current market".
Rather than the 160 pence per share Friends said it was worth in its full-year results, based on its embedded value at the end of 2007 -- and which some shareholders have used as the least Flowers should offer -- Flowers now sees the value around 105-110 pence.
PRESSURE ON BOARD
That figure strips out the takeover premium in the share price of asset manager F&C, majority owned by Friends, and reflects the reduction in its book value caused by the slump in stock markets since the beginning of the year.
The sources said Flowers had met Friends shareholders, hoping they would put pressure on the board to hold talks.
"It's about investors' view of risk. Do they want to spend 18 months or two years waiting for the stock to recover, or do they want cash now?" another of the sources said.
So far, only Scottish Widows, Friends' largest investor with around 6.5 percent, has publicly come out in support of the insurer's rejection of Flowers' offer. As a former mutual, around a quarter of Friends is owned by retail investors.
"If the bid fundamentally undervalues Friends, why is the share price 10 percent below Flowers' cash offer?" Collins Stewart analysts said in a morning note.
"Scottish Widows may support the Friends board, but some other major shareholders certainly do not."
Friends has said it could sell high-end insurer Lombard and its stake in F&C. Turbulent markets could make a deal difficult, but Friends said both had received interest and a sale of either before April 30 could help appease shareholders.
Flowers, which would take Friends private if its offer succeeds, has indicated it would not sell Lombard in the short term while markets remain turbulent and valuations low.
Media reports have put Lombard's price tag as high as 700 million pounds, but few expect Friends to get such a large premium for a deal it completed two years ago for 400 million.
"Lombard is a good business but it's the wrong time of the cycle to be selling it," one of the sources said.
(Editing by David Hulmes)
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