British insurer LV= has released details of its sale to American private equity business Bain Capital and why it rejected Royal London’s offer in the final stages.
The information comes a day after International Adviser reported that Royal London emailed LV= chief executive Mark Hartigan about potential ‘three-way’ discussions between the firms, if the insurer’s members vote down Bain’s takeover on 10 December 2021.
Alan Cook, LV= chairman, deemed the move “unfair and misleading” especially since the intervention comes a year after the firm terminated confidential discussions. Cook claims Royal London is “seeking to destabilise the conclusions of our comprehensive strategic review, in close proximity to what is a very important vote for our members”.
LV= confirmed that Royal London’s offer was, as rumoured, £10m higher than Bain’s bid, but it believes the private equity firm’s was more valuable.
Competing bids
Bain Capital offered £530m ($710m, €619m) for LV=’s non-profit business and proposed to assume all material historic and future liabilities, as well as offering a “perpetual fixed-rate card” for both administration and investment management, LV= revealed.
At the same time, Royal London bid £540m for the business but it proposed leaving material liabilities in respect of the non-profit business with LV=’s with-profit fund. The proposal included higher and less certain administration and investment management costs as well.
The private equity firm’s proposal was “substantially complete from a due diligence perspective and provided execution certainty”, LV= said.
Royal London’s bid, instead, had “material due diligence outstanding which could have further impacted value and/or risk to LV= members”.
LV= added that it was “surprised and disappointed” that the rival insurer declined its request to progress due diligence investigations during the final stages of the M&A process. It said that contrary to “general market practice”, Royal London insisted that it did not want to incur additional marginal costs ahead of being granted exclusivity.
This, LV= said, would have “significantly weakened its negotiation position with Royal London and would have involved terminating discussions with other parties who, ultimately, put forward a better and more certain transaction”.
No guarantees
As part of its offer, Bain Capital committed to investing and supporting the growth of the LV= new business franchise and brand, as well as investing up to £160m in the firm.
The £530m would have been given to the LV with-profit fund and become a closed ring-fenced fund, protected from the risks associated with non-profit business and operated “solely for the benefit of LV= with-profit members”.
While Royal London proposed similar terms, LV= said that the rival insurer intended to leave material liabilities for the non-profit business with LV= with-profit fund and it was not willing to offer a dedicated supervisory committee to safeguard the interests of with-profit members.
Royal London also wanted to significantly reduce LV=’s headcount post-acquisition and no commitment was offered for the insurer’s offices in Exeter and Hitchin.
LV= said: “Consistent with its precedent acquisitions of other mutuals, Royal London would have likely extracted material value from LV= for the benefit of Royal London’s own members.”
This claim, LV= said, relates to the acquisitions of Royal Liver and the Co-operative.
‘Unfair and misleading’ intervention
Alan Cook, chairman of LV=, said: “Despite having every opportunity, Royal London failed to submit a superior best and final offer, and therefore the board unanimously concluded that the better value, certainty, investment and structure of Bain Capital’s proposal would be in the best interests of our members.
“The board of LV= is clear that at no point have any of Royal London’s proposals included an offer for membership rights or continuation of mutuality for LV= members, contrary to media speculation. Given this context, the board of LV= believes it is unfair and misleading to characterise any proposal from Royal London as preserving mutuality or offering a real mutual alternative.
“We are also surprised and disappointed by the timing of Royal London’s intervention, which comes more than a year after we terminated our confidential discussions and is seeking to destabilise the conclusions of our comprehensive strategic review, in close proximity to what is a very important vote for our members.
“Given our special general meeting on 10 December, we are seeking to clear up the fog for our members and remove all the uncertainty and confusion that has been created for our members ahead of what is a very important vote. The Board of LV= continues to unanimously recommend the transaction with Bain Capital to its members ahead of the special general meeting on 10 December.”
David Barral, senior independent director of LV=, added: “The proposed transaction with Bain Capital continues to represent the best outcome for members given its attractive valuation and the enhanced and accelerated pay-outs to LV= members, the certainty offered by removing any business risk from the with-profit fund, the release of capital to support LV=’s defined benefit pension scheme liabilities and repay LV=’s debt whilst also distributing value to members and the on-going investment by Bain Capital in LV=’s franchise and brand.
“These attributes are far superior to any proposal received from other third parties, including Royal London. The board therefore continue to unanimously recommend to LV= members to vote in favour of the proposed transaction with Bain Capital.”
Engage in discussions
Royal London responded to Cook’s statement.
“Royal London has long wished to find a way to combine the UK’s two biggest insurance mutuals, in order to deliver the best long-term value for our respective members. We do not want to break up LV= and would be delighted if the LV= board would engage in discussions.
“Our recent email to LV= recognised that they have signed a contract with Bain Capital which we believe would preclude them from having bilateral discussions with Royal London and so we proposed a three-way conversation between Royal London, LV= and Bain Capital.
“Royal London can confirm that staying mutual is an option if LV= makes this a priority and engages in talks with us.”
Barry O’Dwyer, group chief executive of Royal London, added: “LV= members have an important choice to make. I call on the LV= board to engage with us to explore how LV= customers can continue to have their life savings protected and invested by a mutual.”
