Resolution may go private for next deal

LONDON Fri Nov 6, 2009 9:01am EST

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LONDON (Reuters) - British insurance-focused acquisition vehicle Resolution, back on the takeover trail after completing its first deal this week, is likely to find its next target outside the publicly quoted sector.

Resolution, which aims to buy and merge at least three insurers before floating the enlarged company on the stock market in 2012, needs to pull off its next deal soon.

But the company, led by entrepreneur Clive Cowdery, will probably find it easier to do so away from the public market, where the faintest whisper of bid interest can propel the share price of potential targets beyond reach.

"Tt's clear that Resolution needs to do deals, and I would expect it would need to do something quickly," said a senior insurance industry executive who asked not to be named.

"But it must be difficult for Clive to pull this off twice, because people will see him coming this time."

Resolution, created last year to buy life insurers and asset managers, completed its 1.86 billion pound ($3.1 billion) all-share takeover of Friends Provident Thursday.

When the deal was announced in August, Cowdery said the next takeover target would likely be a life insurer rather than asset manager and could be the local subsidiary of a foreign company, a bank or a large British insurer that did not wish to continue to focus on the British market.

Legal & General, seen as a potential second target, may have become prohibitively expensive after bid speculation pushed its share price up 25 percent in a single week last month, analysts said.

While L&G shares have since given back some of that gain, they may still offer too narrow a discount to embedded value -- a key measure of insurance companies' worth -- for Resolution to achieve its targeted investment return.

"I feel it's pretty expensive at this sort of level, perhaps driven there by people expecting some sort of deal," ING analyst Kevin Ryan said, adding: "I think Clive wants a significant discount to EV."

Buying an unlisted insurer may also appeal because the negotiation process would be more straightforward, with reduced scope for public spats of the kind that disrupted talks between Resolution and Friends this summer.

"Buying a non-listed part of someone else is simpler, and you are dealing with one entity, not a whole raft of shareholders," said a banker who covers the insurance sector.

Friends secured concessions on Resolution's corporate governance and executive pay arrangements after publicly criticising them during pre-merger talks between the two sides in August.

More than half of Resolution's own 25-strong list of potential takeover targets, unveiled during a presentation to analysts and investors three months ago, are privately-owned, or are the unlisted susbidiaries of publicly-quoted parent companies.

They include Scottish Widows and Clerical & Medical, the life insurance operations of part-nationalised lender Lloyds Banking Group, as well as the British subsidiaries of European insurers Aegon, Axa and Zurich Financial Services.

"Cowdery will go after the UK assets of an overseas company, and that is because the valuations of all the listed (British) companies have bounced back," said a second banker.

The FTSE index of British life insurance stocks, helped by a financial market rebound, has more than doubled since worries over the sector's capital strength pushed it to a multi-year low in March.

(Editing by Dan Lalor)

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