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J.C. Flowers Targets UK Insurer Friends Provident

Reuters
Monday, 21 Jan 2008 | 12:46 PM ET

U.S. private equity firm JC Flowers said on Monday it was considering making an offer for Britain's Friends Provident, boosting the shares of the stricken insurer.

JC Flowers, which also said an entity that it advises had acquired a stake of around 2.7 percent in Friends, stated that it intended to approach Friends' board "with a view to developing a proposal that will deliver value for Friends Provident's shareholders."

Friends' shares closed 3.6 percent higher after the news.

JC Flowers approached the Friends Provident board before Christmas calling for talks on an informal bid worth around 175 pence per share, a source familiar with the situation said.

But Friends declined to enter discussions at that time, partly because of concerns that Flowers could not deliver a workable bid, and in particular would struggle to raise enough money in the debt markets during the credit crunch to fund the around 4 billion pound ($7.80 billion) bid, the source said.

MF Global analyst Peter Eliot said JC Flowers' renewed approach was no surprise. "They were interested before, when the share price was 50 pence higher than it is today, so it stands to reason they should show interest again."

Cheap at the Price

Pali International analyst Marcus Barnard said any bid pitched at 175 pence per share would be "a steal." That price would only be a little above Friends' current embedded value, while Pearl Group's recent bid for insurer Resolution was at about 1.2 times embedded value.

An eventual takeout price is likely to be higher, but the turbulent equity market conditions, in which insurance shares have been battered, will hinder Friends' attempts to wring an offer from Flowers, or another bidder, nearer the 200 pence per share level they are reportedly angling for, analysts said.

JC Flowers is likely to look to break up Friends, say analysts, selling off assets such as its majority stake in asset manager F&C and Friends' back book of UK life policies.

Most of these options are already being considered by Friends' current interim management, executive chairman Adrian Montague and finance director Jim Smart, as part of a root-and-branch strategic review expected at the end of this month, said analysts.

Friends, Britain's smallest blue-chip life insurer, has been facing tough questions about its future since it abandoned key growth targets last year and a planned 8.7 billion pound merger with rival Resolution fell through.

But attempts late last year at putting together a consortium bid proved difficult, a banking source said.

"Perhaps JC Flowers sees an opportunity the way the markets are now?" said MF Global's Eliot. "Even if it can't sell all the bits now, then what it's left with is so attractive at these prices that it's worth having anyway."