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Sep 4, 2014

Manulife buying Standard Life's Canadian operations

$4 billion deal boosts Manulife's Quebec presence
By Euan Rocha, Jeffrey Hodgson and Simon Jessop/Reute
    
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TORONTO/LONDON (Reuters) — Manulife Financial and Britain's Standard Life have agreed to a near-$4 billion deal for the Canadian operations of the British insurer as part of a broader global tie-up.

The $4 billion cash deal will significantly expand Manulife's presence in Quebec and make Standard Life's earnings less volatile while helping it to continue to grow its asset management arm, analysts said.

Manulife said the transaction would boost earnings after the first year and more than double its presence in the largely French-speaking Canadian province, while Standard Life said it will return more than half of the sale proceeds to shareholders.

The companies will also expand an existing wealth and asset management partnership, with Manulife distributingStandard Life funds in Canada, the United States and Asia, while Standard Life reciprocates in the British retail market.

"I think this is a good deal for Manulife," Morningstar analyst Vincent Lui said, noting that Standard Life is a pioneer in areas such as liability-driven investments and that Manulife can benefit from the know-how gained via the acquisition.

Lui also said that the access and growth opportunities in Quebec are a huge bonus.

"Quebec is a market that has been to an extent ignored by a lot of the large Canadian insurers, so this deal gives Manulife a quick strategic entry point into that market," he said.

IMPROVED RISK-PROFILE

Analysts were even more positive on the benefits for Standard Life, describing the deal as "excellent" and "fabulous" in notes to clients.

Panmure Gordon's Barrie Cornes hailed what would be an improved risk profile of the company, saying: "Given the Canadian business includes a capital-intensive book of legacy spread/risk business, the disposal will substantially reduce Standard Life's overall capital requirements, volatility and exposure to market risk."

Shore Capital analyst Eamonn Flanagan said the disposal removes significant exposure to spread-and-guarantee risk but kept a "hold" rating on the stock, preferring Prudential and Legal & General for their purer exposure to insurance.

The contribution of Standard Life Investments', the insurer's fund arm, to Standard Life's fee-based revenue surged to 40 percent in the first half of the year from 29 percent five years ago, a Reuters analysis of half-yearly results showed.

"However, full marks to Standard Life for this move," Flanagan said.

Standard Life currently trades on a forward price-earnings ratio of 14.26, making it the most expensive of the leading UK insurers, though its return on equity is below average, Thomson Reuters data showed.

The money Standard Life plans to return to shareholders will be paid through a dividend that allows certain investors to report it as either income or capital, it said. A total payout of 1.75 billion pounds would equate to 73 pence per share.

Chief Executive David Nish declined to say what the company would do with the rest of the cash, but the company said it intends to carry out a share consolidation after the payout.

Manulife CEO Donald Guloien predicted that it would take one to two years to integrate the Standard Life assets.

"We think it is a great match with our organisation for a whole variety of reasons ... They've developed some very creative products that are a terrific complement to ours," he told reporters on a conference call.

Manulife said the deal significantly builds its capacity to offer services including group benefits and retirement, several areas of asset management, plus liability-driven investing.

Standard Life's Nish, meanwhile, said that his company would now be able to realise the full value of a business that has been turned around in recent years and expand collaboration on distribution. This could triple the $6 billion of assets under management already gained through a similar distribution deal with Manulife's John Hancock business, Nish said.

The insurer said the purchase will be partly funded by the sale of about $2.1 billion of subscription receipts by way of a $1.6 billion public-bought deal and a $500 million placement with the Caisse de dépôt et placement du Québec pension fund. The balance will be paid for from internal funds and possible future sale of debt and equity. 

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