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NatWest bids $17B for L&G
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September 6, 1999: 5:52 a.m. ET
Britain's number-three bank details cash-and-share offer for insurer; shares slip
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LONDON (CNNfn) - Britain's National Westminster Bank Monday announced details of its 10.75 billion pound ($17.2 billion) offer for life insurer Legal & General, marking the latest phase in a recent wave of alliances and mergers in the European financial sector.
NatWest, Britain's third-biggest bank, is offering 210 pence per share for L&G (LGEN), including 85 pence in cash and the rest in new NatWest shares. The price includes 5.91 billion pounds ($9.49 million) of goodwill.
After completion of the deal, Natwest shareholders would end up owning around 75 percent of the new financial services powerhouse with a market capitalization of around 30 billion pounds. L & G shareholders would control 25 percent.
NatWest (NWB) stock closed down 5.6 percent Friday on concerns NatWest may be overpaying. The stock continued to slip early Monday in London, easing 0.35 percent to 1,138 pence.
L&G shares soared on the news, jumping 9 percent Thursday as reports of the deal hit the markets, and an additional 6.8 percent Friday to 205.25 pence. But the stock dipped 0.37 percent Monday.
The $17.27 billion price tag represents a 20 percent premium to L&G's share price of 175 pence Wednesday before the news leak.
The merger aims to unite, in a seamless financial-services portfolio, the extensive branch network of NatWest, one of Britain's "Big Four" retail banks with 6.5 million personal account holders, with L&G's insurance and low-cost savings products.
But analysts say the jury is still out on whether the so-called "one-stop" financial shopping emporiums spawned by such mergers will ultimately pay off in the form of more customers seeking a wider range of services under one roof.
Britain's largest retail bank, Lloyds (LLOY) in June launched a 7 billion pound bid for mutual life and pension group Scottish Widows.
But the business of offering life insurance products alongside banking services and other savings products is still largely unproved in the U.K. market, analysts note.
In the Scottish Widows deal, Lloyds paid 1.4 times Widows' "embedded" value. That's the aggregate value of the company's current net assets and premiums, plus the value of future premiums.
NatWest paid substantially more for L & G - 2.2 times embedded value - but analysts said some of the extra cost may be partially justified by L&G's strong growth prospects.
"Very good" growth outlook for L&G
NatWest itself has a relatively depressed price/earnings ratio of 13.5 and a market capitalization of about 20 billion pounds. The L&G purchase, analysts say, could add dynamism to NatWest's bottom line.
"The outlook for growth at Legal & General is very good," said Jon Kirk, an analyst with Fox-Pitt, Kelton in London. "But we still think 2.2 times (embedded value) is a little bit rich."
Both companies indicated Monday they don't expect - and wouldn't invite - other bidders to pounce with a counter-offer.
Kirk said the relatively "full" price being offered for L&G was a disincentive for rival bids.
"The only reason for a rival bidder to come in is if they can offer a more cash-based proposition," he said. "Looking at U.K. banks, no-one obvious has enough cash to do that." As for the possibility of an outsider such as Germany's Allianz popping a bid, Kirk said that the lack of overlap inherent in a cross-border merger would make the price-tag even more prohibitive.
He said the merged group will face a sizable challenge in enabling their information-technology network to accommodate the added demands of one-stop financial banking.
Customers, for instance, would probably want to see their mortgage or insurance premiums listed on a single itemized record, alongside their bank balances.
Natwest said it plans to finance the transaction with 6.40 billion pounds of new shares, 2.25 billion pounds in debt, and the rest in cash.
Savings of at least 130M pounds
The bank anticipates pretax cost savings of at least 130 million pounds by the end of 2002. The bank's current chief executive officer, Derek Wanless will be CEO of the merged group. David Prosser, L&G's chief executive, will head the new group's retail operations, including the Coutts private banking group as well the consumer banking, life insurance, pensions and fund management businesses.
The move comes amid a broader streamlining at NatWest, which has spun off money-losing units in recent years while focusing on building a leaner retail operation.
Some other British insurers experienced a sharp surge on the back of the NatWest-L&G news Friday. Norwich Union (NU) advanced 9.9 percent to 470 pence Friday as traders speculated about an offer from Barclay's bank.
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