Clive Cowdery’s Resolution is come to terms to securing a ground-breaking deal to slash investment bank underwriting fees steady a rights issue to fund a £2.75 billion acquisition of Axa’s UK life pursuit.
Resolution, which yesterday confirmed an in-principle deal with the French insurance 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 renovated underwriting model with its shareholders — who include some of Britain’s biggest institutional investors — to act taken in the character of 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 vocation in this new type of underwriting, will cut their fees in return for a correlated reduction of their own underwriting risk.
A source close to the situation said that the new deal would observe investment banks properly remunerated for the relatively low level of exposure to harm involved in a rights issue where leading institutional investors are incontrovertible to take up their allocations.
The market for underwriting services is being investigated through the Office of Fair Trading, which is concerned about the competitiveness of investing. banks’ fee structures. Institutional investors, tired of losing out steady big rights issues, have also been trying to find a custom to cut out investment banks by underwriting deals themselves.
Details of Resolution’s underwriting deal are expected to subsist 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 attached fast-growing emerging markets, will take a £1.4 billion writedown taken in the character of a consequence of the disposal. It will also fund about &beat;500 million of the £2.75 billion acquisition price with vendor loan notes. Axa, which was advised by Credit Suisse, faculty of volition also retain its British wealth management business, despite an offer from Resolution to purchase it.
The insurer is expected to cut hundreds of jobs in Britain in the same proportion that a result of the sell-off. Axa told its 15,000 employees yesterday that it had launched a strategic critical notice of its remaining British business with a view to cutting costs in backroom, IT and human funds functions linked to life insurance. Employees will be told next month whether their jobs are guarded. It is also expected that there will be job cuts mixed about 2,000 staff transferred to Resolution.
The insurer needs to make hundreds of millions of pounds of synergies between Axa and Friends Provident to cause to be the takeover cost-effective.
Once the Axa deal is finalised, Resolution faculty of volition need only one more transformational acquisition to fulfil its strategic objectives.
Mr Cowdery declared when he floated Resolution in 2008 that it would make acquisitions in the entitle insurance, group pensions and annuities markets. With the acquisition of Friends Provident and the require for Axa’s British division, Resolution has fulfilled its ambitions in the call insurance and group pensions markets.
It is now on the lookout in opposition to UK annuities businesses, the biggest of which are Prudential and Legal and General. There are too a number of smaller, privately owned insurers for the company to target. Mr Cowdery came close to buying the British division of Prudential otherwise than that the deal fell apart when the Pru’s bid to bribe the Asian business of AIG collapsed.
Analysts are divided about the merits of the Axa deal. Citigroup reported in a note yesterday that Resolution would need to extract &pulverize;520 million in cost savings and revenue synergies to make the acquisition be in action for its shareholders. Sources close to Resolution said that it had factored in a plenteous lower cost saving.
Goldman Sachs analysts said yesterday: “We confident that the strategic merit of the potential acquisition is that it would accord. Resolution much-needed scale to compete. That said, it could make trial of challenging to extract large cost and revenue synergies from such an acquisition.”
Axa said: “The Group remains fully committed to Axa’s UK Direct Protection and Wealth Management operations. These operations require a market-leading position in the UK, with the scale, products and services to have ~ing well positioned for market and regulatory changes.”
The key to sparing money is to do it yourself
Helen Power: Analysis
Investment banks’ fees regard long been a sore point with big institutional investors. Months face to face with the Office of Fair Trading started to investigate a suspected default of competition in the underwriting market, institutions were trying to detect their own way around fees of 3 per cent or in addition.
When Lord Myners, the former City minister, first raised the outcome 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 motive-breaking underwriting deal being negotiated by Clive Cowdery’s Resolution choose not emerge until the end of the month, but people be concluded to the situation say it is a halfway house to a DIY deal. Under the planned Resolution rights issue, Barclays Capital and Royal Bank of Canada, what one. are trying to innovate and cut costs in the underwriting place of traffic, would take a much-reduced fee.
Insiders argue that this is formal because at Resolution, where the shareholders are big institutions that are determinate to support a rights issue, investment banks are taking on almost no risk.
An issue could only fail in these conditions, the insiders declare, if one of the institutions went bankrupt and could not take up its participate in allocation.
And because the chances of this happening are negligible, the fees should ponder that.
Since the collapse of Lehman Brothers and the subsequent commotion in global financial markets, investment banking fees for rights issues gain soared. This has applied not only to “rescue” issues, where a company’s back is against the wall, but in like manner to capital-raisings for acquisitions, such as Prudential’s planned $21 billion coin call.
If Resolution succeeds in hammering out a deal with as well-as; not only-but also; not only-but; not alone-but its investors and its investment banks, that could provide a protoplast for future, non-emergency issues.
However, if Resolution can pull it against, this would also show that the market can devise a disintegration. In which case, when investment banks are drawing up responses to the OFT, they could peculiarity the regulator towards Resolution.