Friends eyes F&C, Lombard sales, shares tumble

LONDON (Reuters) - Friends Provident FP.L could sell two of its largest units and cut 600 jobs in a radical overhaul, but uncertainty over its future, a dividend cut and charges that will almost wipe 2007 profit battered its shares.

After two-and-a-half months reviewing its strategy as speculation grew, the British life insurer confirmed on Thursday that it could sell its majority stake in UK fund manager F&C (FCAM.L), as well as insurer Lombard, which targets the wealthy, and financial advisor Pantheon, marking the three as "non-core".

F&C and Lombard alone are expected to fetch at least 1.2 billion pounds ($2.4 billion) if Friends can find buyers -- three times the medium-term funding gap Friends outlined last year, when it was still paying commissions to fuel a fast-growing corporate pensions business.

Friends bought Pantheon, also focused on wealthy clients, for 33 million pounds last year, including earnout provisions.

Friends also announced plans to refocus its core UK business, cutting upfront commissions for some pensions, slashing 600 out of some 4,000 jobs, and taking a 160-million-pound charge to account for escalating problems with customers dropping out early.

That and other charges totaling 440 million pounds will leave its underlying 2007 profit at just 20 million pounds.

Friends also plans to halve its dividend as part of the overhaul it says will allow it to "live within its means".

"This is the foundation. We intend to build on it and to deliver on it as swiftly as we can," Friends chairman Adrian Montague told investors.

RUDDERLESS?

The insurer had been expected to sell at least two units in a shake-up to boost cash flow, but gave no hints on Thursday on whether there had been approaches for the businesses or the entire group. The company said a sale could take months.

F&C said separately it had not had any approaches.

"We have ruled nothing in and nothing out," Montague said, when asked about the future of businesses earmarked for a sale.

Montague confirmed the group's new Chief Executive Trevor Matthews, a highly regarded industry veteran, was not expected to join from rival Standard Life (SL.L) until July, a delay that fuelled more concerns over the insurer's direction.

"They are going to be a rudderless ship and that means investors will be begging for Chris Flowers to take Friends out," Collins Stewart analyst Tim Young said.

Former Goldman Sachs banker Chris Flowers's group said last week it had considered making an offer for Friends.

Friends shares dropped on Wednesday after news of Matthews's appointment dampened hopes of a full sale or break-up for the group. The rebased dividend and concerns over the group's future pushed the stock down almost another 13 percent on Thursday.

At 1426 GMT, it was down 11.7 percent at 137 pence, well below the 175p level at which Flowers had sought talks.

"UNACCEPTABLE" RESULTS

Friends has been in the throes of a strategy review since a merger with rival Resolution (RSL.L) fell through last year and it was forced to abandon growth targets. It ousted CEO Philip Moore in November, just months after he had taken the helm.

Full-year sales, detailed alongside the review on Thursday, illustrated the group's problems, with headline numbers coming in well below expectations, overshadowed by clients cashing in early and a poor performance at high-margin Lombard.

"The board recognizes that the group's recent results are unacceptable and must be improved," Friends said in Thursday's statement. "The new strategy is a significant change for the business and will take much of 2008 to implement."

As part of the cuts, Friends said it would keep its 2007 dividend level with 2006 but would then cut it to reflect the reduced size and cost base of the overhauled business.

But, it also said capital released from the sales would be returned to shareholders and it will no longer tap the capital markets for cash, scrapping a bond plan revived late last year.

As part of efforts to reduce costs, Friends said it would stop paying initial commission on new group pension schemes -- long a drain on resources -- and would target larger deals.

That could slow its UK pensions business, but Friends said credit ratings downgrades on Thursday would not affect its ability to write corporate business.

Friends plans to remain in protection insurance, core for group sales, despite turbulence in the mortgage market, and aims to maintain its market share.

The group said separately that 2007 life and pensions sales rose 8 percent to 7.7 billion pounds, well below average analyst forecasts of 8.3 billion.

UK new business, up 7 percent, also undershot expectations, while Lombard posted a surprise 38 percent drop in the last three months of the year to fall 5 percent year-on-year.

(Editing by Suzy Valentine, Alexander Smith and Mark Potter)