Flowers prepared to drop Friends bid: sources

By Clara Ferreira-Marques and Simon Challis

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".