Cowdery goes it alone to cut banks’ fees
Clive Cowdery’s Resolution is agree to securing a ground-breaking deal to slash investment bank underwriting fees ~ward a rights issue to fund a £2.75 billion acquisition of Axa’s UK life occupation.
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 recently made known 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 investing. banks.
The two banks, which are trying to build a avocation in this new type of underwriting, will cut their fees in return for a correlated reduction of their own underwriting risk.
A origin close to the situation said that the new deal would penetrate investment banks properly remunerated for the relatively low level of jeopardy involved in a rights issue where leading institutional investors are determinate to take up their allocations.
The market for underwriting services is subsistence investigated by the Office of Fair Trading, which is concerned with reference to the competitiveness of investment banks’ fee structures. Institutional investors, tired of losing out on big rights issues, have also been trying to notice a way to cut out investment banks by underwriting deals themselves.
Details of Resolution’s underwriting deal are expected to have ~ing announced before the end of this month, by which time Resolution is expected to hammer out its final deal with Axa.
Axa, which wants to refocus its energies without ceasing fast-growing emerging markets, will take a £1.4 billion writedown being of the kind which a consequence of the disposal. It will also fund about &strike;500 million of the £2.75 billion acquisition price by vendor loan notes. Axa, which was advised by Credit Suisse, wish also retain its British wealth management business, despite an offer from Resolution to pervert with money it.
The insurer is expected to cut hundreds of jobs in Britain taken in the character of 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 money functions linked to life insurance. Employees will be told next month whether their jobs are safe. It is also expected that there will be job cuts amidst about 2,000 staff transferred to Resolution.
The insurer needs to occasion hundreds of millions of pounds of synergies between Axa and Friends Provident to flow the takeover cost-effective.
Once the Axa deal is finalised, Resolution inclination need only one more transformational acquisition to fulfil its strategic objectives.
Mr Cowdery related 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 call for Axa’s British division, Resolution has fulfilled its ambitions in the bourn insurance and group pensions markets.
It is now on the lookout during the term of UK annuities businesses, the biggest of which are Prudential and Legal and General. There are moreover a number of smaller, privately owned insurers for the company to mark. Mr Cowdery came close to buying the British division of Prudential otherwise than that 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 afore~ in a note yesterday that Resolution would need to extract &bray;520 million in cost savings and revenue synergies to make the acquisition work for its shareholders. Sources close to Resolution said that it had factored in a a great quantity lower cost saving.
Goldman Sachs analysts said yesterday: “We believe that the strategic have a right to of the potential acquisition is that it would give Resolution much-needed scale to compete. That said, it could prove challenging to determine large cost and revenue synergies from such an acquisition.”
Axa afore~: “The Group remains fully committed to Axa’s UK Direct Protection and Wealth Management operations. These operations be delivered of 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 without disrespect to money is to do it yourself
Helen Power: Analysis
Investment banks’ fees consider long been a sore point with big institutional investors. Months prior to the Office of Fair Trading started to investigate a suspected lack of competition in the underwriting market, institutions were trying to provide their own way around fees of 3 per cent or else.
When Lord Myners, the former City minister, first raised the number last autumn, the institutions — under the auspices of the Association of British Insurers — were already looking at how to do a DIY rights issue.
Details of the found-breaking underwriting deal being negotiated by Clive Cowdery’s Resolution volition not emerge until the end of the month, but people terminate to the situation say it is a halfway house to a DIY deal. Under the planned Resolution rights impression, 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, where the shareholders are big institutions that are certain to support a rights number printed, investment banks are taking on almost no risk.
An issue could excepting that fail in these conditions, the insiders say, if one of the institutions went bankrupt and could not take up its share allocation.
And because the chances of this happening are negligible, the fees should meditate that.
Since the collapse of Lehman Brothers and the subsequent turmoil in global financial markets, investment banking fees for rights issues regard soared. This has applied not only to “rescue” issues, at what place a company’s back is against the wall, but in like manner to capital-raisings for acquisitions, such as Prudential’s planned $21 billion turn into money call.
If Resolution succeeds in hammering out a deal with the two its investors and its investment banks, that could provide a mould for future, non-emergency issues.
However, if Resolution can pull it over, this would also show that the market can devise a separation. In which case, when investment banks are drawing up responses to the OFT, they could respect the regulator towards Resolution.