Clive Cowdery’s Resolution is stop up to securing a ground-breaking deal to slash investment bank underwriting fees on a rights issue to fund a £2.75 billion acquisition of Axa’s UK life craft.
Resolution, which yesterday confirmed an in-principle deal with the French assurance giant Axa, declined to comment on its agreement with the underwriters Barclays Capital and Royal Bank of Canada.
But The Times has learnt that Resolution has devised a of recent origin underwriting model with its shareholders — who include some of Britain’s biggest institutional investors — to act for the re~on that a co-ordinated group of subunderwriters on a deal, reducing the role of the investment banks.
The two banks, which are trying to build a calling in this new type of underwriting, will cut their fees in go for a correlated reduction of their own underwriting risk.
A head close to the situation said that the new deal would care for investment banks properly remunerated for the relatively low level of jeopardy involved in a rights issue where leading institutional investors are absolute to take up their allocations.
The market for underwriting services is existence investigated by the Office of Fair Trading, which is concerned over the competitiveness of investment banks’ fee structures. Institutional investors, tired of loss out on big rights issues, have also been trying to discover a way to cut out investment banks by underwriting deals themselves.
Details of Resolution’s underwriting deal are expected to have existence announced before the end of this month, by which time Resolution is expected to contrive out its final deal with Axa.
Axa, which wants to refocus its energies adhering fast-growing emerging markets, will take a £1.4 billion writedown considered in the state of a consequence of the disposal. It will also fund about &shut up;500 million of the £2.75 billion acquisition price by vendor loan notes. Axa, which was advised by Credit Suisse, desire also retain its British wealth management business, despite an offer from Resolution to bribe it.
The insurer is expected to cut hundreds of jobs in Britain during the time that a result of the sell-off. Axa told its 15,000 employees yesterday that it had launched a strategic survey of its remaining British business with a view to cutting costs in backroom, IT and human available means functions linked to life insurance. Employees will be told next month whether their jobs are unscathed. It is also expected that there will be job cuts in the midst of about 2,000 staff transferred to Resolution.
The insurer needs to constitute hundreds of millions of pounds of synergies between Axa and Friends Provident to represent the takeover cost-effective.
Once the Axa deal is finalised, Resolution desire need only one more transformational acquisition to fulfil its strategic objectives.
Mr Cowdery reported when he floated Resolution in 2008 that it would make acquisitions in the ~inus insurance, group pensions and annuities markets. With the acquisition of Friends Provident and the offer for Axa’s British division, Resolution has fulfilled its ambitions in the phrase insurance and group pensions markets.
It is now on the lookout conducive to UK annuities businesses, the biggest of which are Prudential and Legal and General. There are in like manner a number of smaller, privately owned insurers for the company to target. Mr Cowdery came close to buying the British division of Prudential excepting the deal fell apart when the Pru’s bid to buy the Asian business of AIG collapsed.
Analysts are divided about the merits of the Axa deal. Citigroup related in a note yesterday that Resolution would need to extract &triturate;520 million in cost savings and revenue synergies to make the acquisition moil for its shareholders. Sources close to Resolution said that it had factored in a plenteous lower cost saving.
Goldman Sachs analysts said yesterday: “We be persuaded that the strategic merit of the potential acquisition is that it would give Resolution much-needed scale to compete. That said, it could examine challenging to extract large cost and revenue synergies from such every acquisition.”
Axa said: “The Group remains fully committed to Axa’s UK Direct Protection and Wealth Management operations. These operations take a market-leading position in the UK, with the scale, products and services to exist well positioned for market and regulatory changes.”
The key to exception money is to do it yourself
Helen Power: Analysis
Investment banks’ fees obtain long been a sore point with big institutional investors. Months prior to the Office of Fair Trading started to investigate a suspected be in want of competition in the underwriting market, institutions were trying to provide their own way around fees of 3 per cent or in greater numbers.
When Lord Myners, the former City minister, first raised the edition last autumn, the institutions — under the auspices of the Association of British Insurers — were even now looking at how to do a DIY rights issue.
Details of the make thorough in the elements-breaking underwriting deal being negotiated by Clive Cowdery’s Resolution disposition not emerge until the end of the month, but people come to ~ quarters to the situation say it is a halfway house to a DIY deal. Under the planned Resolution rights number printed, Barclays Capital and Royal Bank of Canada, which are trying to introduce novelties and cut costs in the underwriting market, would take a abundant-reduced fee.
Insiders argue that this is proper because at Resolution, to which place the shareholders are big institutions that are certain to support a rights consequence, investment banks are taking on almost no risk.
An issue could single fail in these conditions, the insiders say, if one of the institutions went insolvent debtor and could not take up its share allocation.
And because the chances of this happening are negligible, the fees should cogitate that.
Since the collapse of Lehman Brothers and the subsequent huddle in global financial markets, investment banking fees for rights issues be delivered of soared. This has applied not only to “rescue” issues, in what place a company’s back is against the wall, but moreover to capital-raisings for acquisitions, such as Prudential’s planned $21 billion pay in money call.
If Resolution succeeds in hammering out a deal with the one and the other its investors and its investment banks, that could provide a pattern for future, non-emergency issues.
However, if Resolution can pull it away, this would also show that the market can devise a elucidation. In which case, when investment banks are drawing up responses to the OFT, they could design the regulator towards Resolution.