For a corporate marriage supposedly made in heaven, the great Aviva/Friends Life deal received a less than rapturous reception. The 5% slide in Aviva’s share price captured the sense of bafflement around the insurer’s planned all-share bid, which was worth £5.6bn on announcement last Friday but is now valued at closer to £5.3bn.
Why would Aviva, which spent a decade struggling to merge its component parts, want to dive back into the restructuring game? And why get bigger in annuities in the UK, a Friends specialism, when chancellor George Osborne has just liberated pensioners to do more exciting things with their pension pots? Wasn’t Aviva, under reforming chief executive Mark Wilson, meant to be looking overseas for growth?
The official answer makes some theoretical sense: Aviva’s balance sheet and cash flows will get a shot in the arm. The appeal of Friends is its low levels of debt and the cash-generative nature of its operations. Blend those into Aviva’s business and the bidder’s shareholders might enjoy higher dividends over time. Wilson would be able to argue that he is sticking rigidly to his mantra that cash returns matter most.
Yet the strategic rationale feels thin. Short Capital’s analyst called it “a rights issue in disguise”, pointing to the fact that Aviva will hand over 26% of the group to buy an income stream. An investor liking that income could just have bought Friends shares instead.
If Aviva is going to generate more enthusiasm it will have to give a better account of the cost savings, which can’t happen until final terms are signed. The market spies £100m but if the actual figure was, say, £150m-plus, there would be more goodwill, provided the cost of closing offices and so on is not exorbitant.
But the hard fact will remain that Aviva will become more concentrated in UK life assurance and pensions, which doesn’t seem an obvious way to reduce risk in the current climate.
Yes, it’s true that other countries have “national champions” in the field and that a bigger Aviva might have a stronger platform from which to build overseas. And yes, Aviva Investors, the fund management arm, could use the leg-up that will come with taking the administration of some of the Friends assets in-house; Aviva looks enviously at the role M&G has played in the Prudential’s success.
All the same, pouncing on Friends feels like a diversion. Wilson and chairman John McFarlane have restored financial discipline to Aviva after years of drift under Andrew Moss. But the long-term question was always about what sort of company they would want to build: unless the cost savings are spectacular, a combination with Friends feels an underwhelming answer.
Petrofac’s woes
Companies providing services to the oil industry never like a falling oil price, but its impact is not meant to be as painful as this: Petrofac’s share price crashed by a quarter as the FTSE 100 company said next year’s profits would not be $675m, as the market had expected, but more like $500m.
What happened? The short answer is that the lower oil price is just the start of Petrofac’s current woes. The company has travelled a long way from constructing and servicing other people’s oil projects, largely in the Middle East and the North Sea. These days it often takes investment risk as a co-owner, and does so in more places.
Thus the profits warning contained a bit of everything: a big construction contract in Shetland may yield no profit; there are delays to a production-sharing contract in Mexico; the story is similar in Romania; and there is a cost over-run on another North Sea project. The lower oil price was just additional dispiriting drizzle.
The only good news was that the order book on construction projects stands at a record high of $21bn. That provides stability of a sort. What shareholders want to know, though, is that earnings from those contracts won’t leak away as Petrofac chases excitement from investment projects where it has a direct equity stake. On current form, investors would happily live without such excitement.
Error-strewn RBS
To err is human, to make multiple mistakes seems to be the way of Royal Bank of Scotland. Fresh from the £56m fine for its botched IT upgrade and the £400m forex-rigging penalty, chairman Sir Philip Hampton found himself apologising to MPs yesterday for inaccurate evidence given to parliament in June by two senior executives, Derek Sach and Chris Sullivan: it turns out GRG, the bank’s restructuring division, was run as a profit centre.
Then there’s last Friday’s little error. RBS allowed its core tier one capital – a crucial measure of financial strength – to be misreported at 6.7%, instead of 5.7%, under the stress tests conducted by the European Banking Authority. The problem was unearthed by the Bank of England while doing its own tests.
Of course, the EBA also looks silly for not spotting the duff numbers itself. But Hampton must know what’s coming next after the GRG and stress-test errors. Will bonuses will be docked, or clawed back? It’s a fair question.
