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Aviva and Friends Life reach agreement on possible all share combination

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The Boards of Aviva and Friends Life have reached agreement on the key financial terms of a possible all share combination of the two firms (Possible Offer).

The Board of Friends Life has indicated to Aviva that it is willing to recommend the key financial terms of the Possible Offer to Friends Life shareholders, subject to reaching agreement on the other terms and conditions of any offer and the completion of mutual due diligence. Any transaction would be subject to regulatory approval.

A combination of Aviva and Friends Life would create the UK’s leading insurance, savings and asset management business by number of customers, with a stronger balance sheet and significantly higher cash flows, enhanced by substantial synergies, from which to accelerate dividend growth.

Under the terms of the Possible Offer, Aviva would acquire the entire ordinary share capital of Friends Life on the basis of an exchange ratio of 0.74 Aviva ordinary shares for each Friends Life ordinary share.

The exchange ratio and indicative premium have been agreed between the Boards of Aviva and Friends Life having taken into account the impact of the Value Share, and the consideration due from Friends Life to the holders of the Value Share entitlement under the terms of the Value Share arrangement. A detailed description of the Value Share is set out on page 74 of Friends Life's 2013 Annual Report and Accounts, while the most recent Friends Life net equity deployed figure is set out in Note 8 of Friends Life’s Interim Management Statement for the third quarter 2014.

In addition, the Possible Offer will be structured so that Friends Life shareholders would receive (whether by way of dividend or pursuant to the Possible Offer) an amount in cash equal to any Friends Life final dividend payment for the 2014 financial year (but would not be entitled to any additional amount in respect of any final Aviva dividend payment for the 2014 financial year).

Based on Aviva’s closing share price on 21 November 2014, the Possible Offer represents an indicative value of approximately 398.9 pence per Friends Life share (not including the value of the Friends Life final dividend for 2014 and the Value Share) representing an indicative premium of 15 per cent. to Friends Life’s closing share price on 21 November 2014 and an indicative premium of 28 per cent. to Friends Life’s three month average share price of 310.7 pence. Under the terms of the Possible Offer, Friends Life shareholders would own approximately 26 per cent. of the enlarged group.

The Board of Aviva believes that the combination would create the leading insurance and savings business in the UK with 16 million customers, who stand to benefit from being part of a stronger and more diversified group with a wider product range. In line with Aviva’s true customer composite strategy, Friends Life’s 5 million customers will benefit from Aviva’s product offer in general insurance, health, and asset management as well as life insurance.

The transaction is also expected to lead to a substantial increase in profits and assets under management at Aviva Investors through the addition, over time, of Friends Life’s UK assets under management which are currently principally outsourced, materially increasing Aviva Investors’ total assets under management.
The combined business would have leadership positions across key product areas and be better positioned to take advantage of the evolving UK life insurance market with greater capacity to invest and innovate. Specifically the transaction would lead to a substantial increase in Aviva’s protection value of new business, more than double Aviva’s corporate pension assets under administration and create new opportunities by serving Friends Life’s GBP2 billion of annual pension vestings.

Over the past two years, Aviva has gone through a major transformation, creating significant value for its shareholders. The combination with Friends Life would accelerate Aviva’s transformation in line with its strategy of increasing group cash flow and investing for growth in its chosen markets.

The Board of Aviva believes that the combination with Friends Life would deliver significantly higher cash flows enhanced by substantial synergies, principally through operating efficiencies in the combined back books and the removal of overlapping overheads.

The combination would accelerate the transformation of Aviva’s balance sheet, including reducing leverage and strengthening capital and liquidity. These benefits are expected to increase the enlarged group’s financial and strategic flexibility and support further growth of Aviva’s dividends.

As required by Rule 2.6(a) of the Code, Aviva is required, by not later than 5.00 pm (London time) on 19 December 2014, to either announce a firm intention to make an offer for Friends Life in accordance with Rule 2.7 of the Code or announce that it does not intend to make an offer, in which case the announcement will be treated as a statement to which Rule 2.8 of the Code applies. This deadline may be extended with the consent of the Takeover Panel in accordance with Rule 2.6(c) of the Code.

Any offer is subject to satisfactory completion of customary due diligence. Aviva reserves the right, with the recommendation of the Board of Friends Life, to amend the exchange ratio of Aviva ordinary shares for Friends Life ordinary shares.
There can be no certainty that Aviva will proceed to make an offer for Friends Life. A further announcement will be made in due course.

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