Aviva agrees Friends Life takeover

UK insurance giant Aviva has agreed to buy pensions company Friends Life in a £5.6bn deal that will create the UK's largest insurance, savings and asset management firm.

The boards of both companies will now recommend the deal to shareholders.

The deal offers a 15% premium to Friends Life's closing price on the London Stock Exchange on 20 November.

It will also mean Friends Life shareholders will own about 26% of the enlarged Aviva group.

Friends Life was formed in 2011 after the amalgamation of Friends Provident, the majority of Axa UK Life and Bupa Health Assurance.

Aviva said it expected the newly-merged company to generate £600m in excess cash a year and deliver £225m in annual cost savings by the end of 2017.

Like other UK annuity providers, Friends Life has faced an uncertain future since April following the government's radical overhaul of the pensions market.

The reforms are ending the compulsory purchase of annuities - products which provide an income in retirement. As a result, sales of annuities - one of life insurers' most lucrative products - have dropped sharply.

Investors reacted cautiously when news of the takeover first emerged on 21 November, with shares in Aviva falling 5% in one day.

The takeover is the first undertaken by Aviva's chief executive Mark Wilson, who took the helm in January 2013.

Aviva has spent the last two and half years disposing of various businesses, including its annuity provider Aviva US, which it sold to Athene Holdings in October last year for $2.3bn (£1.5bn).