The proposed acquisition from Standard Life Aberdeen PLC (LON:SLA) of SLA’s UK and European life assurance business will increase Phoenix’s scale and will provide increased cash to fund dividends and provide flexibility around funding for future mergers & acquisitions.
The deal will provide Phoenix’s management with greater scope to exert operating leverage due to its variable cost structure and potentially provides access to the European closed life market.
Despite its upbeat view of the deal, HSBC has cut its target price for Phoenix to 750p from 830p, reflecting higher free cash flow estimates offset by an increase in shares in issue.
As for Standard Life, that gets a ‘buy’ recommendation from HSBC, with a new price target of 380p.
“However, we are cautious around Adjusted EPS [earnings per share], and see 4% dilution in 2020e from the transaction as we expect outflows to continue and assume lower investment returns (1% pa over 2019-20e),” HSBC said.
“Also, clarity is needed on certain issues to measure value creation: (i) regulatory capital requirement (under CRD IV) allowing us to analyse capital flexibility; and (ii) strategy for China and India life insurance JVs, which have limited synergies with rest of the group,” it added.
Shares in Phoenix were down 1% at 672.5p while those in Standard Life were down 1.7% at 328.1p.