Friends Provident rejects Cowdery's merger plan

By Quentin Webb and Lorraine Turner

LONDON (Reuters) - Friends Provident (FP.L) rejected a takeover proposal from Clive Cowdery's Resolution Ltd (RSL.L), saying the entrepreneur's terms were inadequate, his company was opaque and a tie-up would hobble the life insurer's management.

However a sharp rise in Friends Provident Group Plc shares on Monday pointed to investor expectations of a sweetened offer and some analysts hailed what could be the first step in a long-awaited consolidation of the sector.

Friends Provident said Cowdery's Resolution, based on the island of Guernsey, had proposed an all-stock deal consisting of 0.8 new Resolution shares for every Friends share.

That would value Friends at about 1.69 billion pounds ($2.7 billion), based on Resolution's Friday closing price of 90-1/4p.

But the target said this was wholly inadequate to compensate its 750,000 shareholders for a "very different type of investment" which would be created if the two groups combined.

It said the proposed set-up's complexity would hinder Friends Provident management strategically and operationally and would offer shareholders less transparency.

"We are open-minded about the benefits of industry consolidation, but at this stage, the pace, direction and value of your consolidation strategy is speculative and uncertain," Friends Chairman Adrian Montague wrote in a letter to Resolution published on Monday.

The proposed deal would leave Friends shareholders with about 74 percent of the combined group.

DIFFICULT OUTLOOK

In an earlier statement, Resolution said it had got "constructive feedback" from Friends Provident and the target's advisers and was mulling its next move.

Resolution said any offer was likely to be primarily in shares but boosted by some cash from the 600 million pounds it raised in a December stock market listing.

Shares in Friends were up 10.3 percent at 66.6p by 1110 GMT, valuing it at about 1.5 billion pounds. Resolution slipped 2.0 percent to 88-1/4p.

Shore Capital analyst Eamonn Flanagan said Resolution would need to offer about 79p a share -- equivalent to Friends Provident's net asset value (NAV) -- to entice shareholders, or could succeed with an offer in the "low 70s" if it included a big cash component.

"They will have to narrow the gap materially," Flanagan said. But he said a decent overlap in the duo's shareholder base would aid Resolution's cause.

Panmure Gordon analyst Barrie Cornes, who has a 75p target price on the stock, said Friends Provident's UK-focused business faced a difficult trading outlook and shareholders were likely to welcome a revised offer from Resolution.