Firm Cash Offer for Resolution plc November 2007
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The Standard Life Offer: Uncertain and Value Destructive � Pearl’s 720p per share cash offer represents certain and compelling value for Resolution shareholders − Given Pearl’s intention to vote against the Scheme on the current terms and the implications for an offer with a 50% acceptance level, Pearl questions the feasibility of Standard Life’s current position � Pearl is the largest shareholder in Resolution with an approx. 24.2% interest − Standard Life needs a 75% vote to implement a scheme − Standard Life needs 75% to de-list Resolution − Standard Life needs a 75% vote for life fund mergers � Pearl believes that Standard Life’s shares and cash offer would be value destructive for Standard Life shares (1) to 266p after announcement of its offer, valuing its offer at − Standard Life’s shares fell 6.1% (2) only once Pearl’s increased offer and higher stake were announced 707p, rallying 8.4% − An acquisition on Standard Life’s current terms would be materially dilutive for Standard (3) Life’s embedded value per share − Delivery of synergies likely to require 75% approval 2 Notes: 1. Between 12.46 on Thurs 25 th Oct and 11:50 on Friday 26 th Oct 2. Between 11:50 and 13:57 on Fri 26 th Oct 3. Details on page 6
Value Destruction? Standard Life Share Price 290 (2) Standard Life rallies 8.4% Market reaction once Pearl stake is to offer is disclosed and increased offer is announced clear! 285 280 275 270 Standard Life Share Price share price falls (1) falls to 266p 6.1% on 265 once Standard announcement of Life confirms terms its offer 260 08:00 10:00 12:00 14:00 16:00 09:30 11:30 13:30 15:30 Thurs 25 th October 2007 Fri 26th October 2007 Source: Bloomberg 3 Notes: 1. Between 12.46 on Thurs 25 th Oct and 11:50 on Friday 26 th Oct 2. Between 11:50 and 13:57 on Fri 26 th Oct
Ill-conceived acquisition, minimal strategic logic (1) acquisition at 1.85x EV (2) of a largely closed business in run-off � A £2.9bn � EV per share dilutive � A small protection business vulnerable to the mortgage market when Standard Life’s own protection business is losing money – more than £33m since 2005 � An asset management business with sharply declining assets and low revenue margins when Standard Life’s stated strategy is to move into high margin, high growth areas � Underwhelming cost synergies � Risks to Standard Life’s own recovery − No large scale acquisition experience, cultural incompatibility and risk to existing cost saving plans − A departure from Standard Life’s organic growth strategy � Pearl believes that this makes Standard Life shares look very unattractive 4 Notes: 1. Consideration of £2.6 billion (based on share price of 276.25p as at close of business of 25 Oct 2007) + net debt of £0.3 billion (£0.9 billion debt less £0.6 billion Group cash) as per Standard Life presentation 2. See page 6
(1) to w hat? Standard Life is committing £2.9bn � Will Standard Life have to restructure / increase? Further goodwill? � Highly competitive protection market � Limited scope Abbey distribution channel � Limited scope for synergies – those announced represent an Goodwill, (2) of pro forma combined EV £899m illustrative 4.6% (0.85x TEV) � £250m of fund merger value to re-create � Asset Management dependent on low revenue margin, run-off internal assets � Standard Life is acquiring gross EV of c.£2 bn (net of £0.6 bn Tangible HoldCo cash) net EV, £1,056m − Business is in run-off � VIF discount rate of 7.6% � Minimal cost saving opportunity – already outsourced to SwissRe / Capita £935m of � Standard Life will assume £935 million of Resolution debt Resolution debt assumed (3) What is SL buying? 5 Notes: 1. Consideration of £2.6 billion (based on share price of 276.25p as at close of business of 25 Oct 2007) + net debt of £0.3 billion (£0.9 billion debt less £0.6 billion Group cash) as per Standard Life presentation 2. Please see page 9 3. Please see appendix page 20
Expensive & Dilutive Acquisition for Standard Life 1.85x 1.85x Stock Consideration 1.69x at c. 1.0x EV 1.45x 1.35x 1.31x Material EV per share dilution (3) of 12.0% Standard Life Interim RAM Excess Transaction Actual multiple multiple dividend goodwill cash costs paid calculation (1) Price 2,555 0 0 (600) 0 1,955 (2) EV 1,953 (63) (134) (600) (100) 1,056 Interim dividend As at 30 June As per SL As per SL of 9.17p 2007 presentation presentation Source: Company Reports 6 Notes: 1. Based on SL’s share price as at COB on 25 October (day before offer) of 276.25p. Resolution’s TSO of 686.4m used (31 October) 2. Net of £935m of assumed Resolution debt 3. As at 30 June 2007. Refer to appendix page 20
Questionable New Business Opportunity � Protection new business was a mere £13 million post-tax in 1H07 What is the real value of new business? � Protection is highly competitive and strongly correlated to the mortgage market − What skills does Standard Life have in protection given its track Where are the record? synergies? � Abbey distribution channel is limited in product breadth − No opportunity for SIPPs – Abbey owns James Hay (1) – Abbey is − Investment new business 1H07 was 45% below 2H06 focused on its own products − Contract terminates in 2016 with reset to market pricing in 2011 � Risk of revenue dis-synergies − Integrating the Scottish Provident and Standard Life IFA sales forces could result in significant attrition and loss of sales momentum Source: Company Reports 7 Note: 1. PVNBP basis
Low Revenue Margin Asset Management in Run-Off � Standard Life asset management strategy: higher margin, higher Low revenue growth margin assets � RAM: Rapidly declining AUM with 91% from internal clients (average revenue margin of 7bps) Fees controlled (2) outsourced to State Street for passive management − c.£20 bn by life boards � How quickly will declining revenues impact the value of the synergies? RAM AUM Development (£ bn) Dominated by Low Revenue Margin Internal Assets 61 9% 7% decline in 1H 07 57 91% 2H 06 1H 07 Internal Assets External Assets Source: Company Reports 8 Notes: 1. As at 30 June 2007 (Resolution Interim Report) 2. Based on Resolution prospectus for acquisition of Abbey businesses, and Resolution annual report 2006
Limited scope for synergies � Total stated synergies of £71m pre-tax (£51m post-tax) Synergies − Limited expense synergies of £13m (post-tax) worth illustrative − Asset management cost savings of £25m (post-tax) required to (1) of total 4.6% maintain margins in face of run-off pro forma EV − Administration of Resolution’s life business is outsourced, savings primarily head office − These synergies, even if achieved, will mostly not accrue to EV Illustrative value of post-tax cost savings (£m) Annual Cost 51 Savings (2) Capitalised x7 358 59 Costs to achieve Net Savings 299 0 50 100 150 200 250 300 350 400 Source: Company reports, presentations and announcements 9 Notes: 1. Using pro forma EEV of £6,564m as per SL presentation and a tax rate of 28% 2. 7x is used for illustrative purposes
A Defensive Acquisition? 10
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