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Fitch comments on potential Aviva-Prudential merger


March 21, 2006   by Canadian Underwriter


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Fitch Ratings predicts any merger between Aviva and Prudential would result in “downward pressure” on Prudential’s current ‘AA’ rating and a “potentially positive” effect on Aviva’s current ‘A+’ rating.
Fitch made its observation following Aviva’s recent announcement of its proposal to acquire Prudential for 17 billion (US$29.7 billion). Aviva’s all-share proposal was rejected by the Prudential board, despite Aviva’s offering a premium to the current share price.
Following the Prudential board’s rejection of the proposal, Fitch said it now expects Aviva to seek support directly from Prudential shareholders. Aviva has stated that any formal bid would only be made if the Prudential board recommends it.
“The rationale for the acquisition relies on combining the geographic strengths of the two companies,” Fitch noted in a press release. “Aviva has a very strong position in Europe, while Prudential has very strong positions in the U.S.A. and Asia. The case for the merger is supplemented by the expected pre-tax annual cost savings of 320 million (offset by integration costs of 482 million).”
These savings are significant, Fitch added, despite the limited operational overlap and would largely relate to head office costs and to the UK life operations. “The agency also takes comfort from the Aviva group’s track record of delivering cost savings from acquisitions,” Fitch said.
Given the strong capitalization of both companies, Fitch expected the proposed merged entity to also be “very strongly capitalized overall.” Fitch said it is not concerned about leverage or coverage, as the current proposal is based on 100% equity financing.
“Historically, the Aviva group has been very successful in executing mergers”, Sanjeev Shah, director in Fitch’s Insurance Group, said. “However, if a potential bid for Prudential were to be successful, this would be Aviva’s biggest merger to date and would therefore also be the most complex to integrate.”


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