British insurer Friends Provident rejected a 3.5 billion pound ($7 billion) cash takeover proposal from U.S. private equity firm JC Flowers because it "significantly undervalues" the firm, Friends said.
Friends said on Monday it received the 150 pence per share indicative proposal last Thursday and Flowers had indicated the offer price would be reduced in the event that Friends Provident paid shareholders its 2007 final dividend of 5.3p a share.
Friends said the proposal "does not represent a basis for discussion", signaling the two sides have not held any talks.
Its shares were up 2.9 percent at 123.6 pence, reflecting an expectation that Flowers could return with a modestly improved offer, dealers said.
"I would be surprised if a higher offer didn't come," said Peter Eliot, an analyst at MF Global. "I don't think that will be Flowers' final offer, there's a lot more value in the business than that, which he knows."
Big shareholders were likely to hold out for an offer nearer 160p, Eliot said. Friends said earlier this month that 160p was the embedded value of the shares reflecting the actuarial value of the company.
Analysts said other suitors could be interested in all or parts of Friends, but tough financial market conditions may temper interest in the short term.
Flowers, which is headed by Chris Flowers, is one of the biggest buyout firm focusing on financial targets. It has been circling the troubled insurer for months, and announced in January it was considering making an offer.
It said at that time it had bought 2.7 percent of Friends and last month called for a meeting with the insurer.
There has been speculation Friends has or will ask Britain's Takeover Panel to issue a "put up or shut up" notice, forcing Flowers to make a firm offer or walk away. Friends declined to comment on whether it had sought this.
Flowers could not immediately be reached for comment.
Friends shares have tumbled from over 190p a year ago, hit by a failed merger with rival Resolution, questions over the strength of its balance sheet, troubles in its core UK business, a dividend cut and a big charge for customers leaving early.
In January it announced plans to sell two of its biggest units and cut 600 jobs in a radical overhaul.