Phoenix Group Holdings plc (LON:PHNX) has announced the acquisition of Sun Life UK, a closed book UK life insurance company, from Sun Life Financial Inc. for cash consideration of £248 million. This equates to an attractive price to shareholder Own Funds ratio of 83%1, in line with the Board’s disciplined approach to the deployment of shareholder capital.
The acquisition is expected to deliver c.£470 million of incremental long-term cash generation, with approximately 30% of this cash generation to emerge in the first three years.
Sun Life UK operates a predominantly outsourced business model with the majority of its policy administration already undertaken by our strategic outsourcing partner (TCS Diligenta), which supports a simplified operational integration programme. We are targeting the delivery of c.£125 million of integration synergies, net of costs, from cost efficiencies and capital management actions, representing c.50% of the consideration paid.
In line with our strategy to diversify our credit portfolio, we have also agreed a new long-term strategic asset management partnership with Sun Life that complements our existing relationships. This will further enhance and diversify our liquid and illiquid credit origination capabilities in North America, building on Sun Life’s strong presence in the region.
The acquisition is subject to regulatory approvals and is expected to complete in Q1 2023.
M&A remains an ongoing strategic priority
Sun Life UK represents c.£10 billion of the estimated £480 billion UK Heritage M&A market. This is our first acquisition to be financed solely from existing cash resources, reflecting the surplus cash and capital available for reinvestment into growth. Such additions to our Heritage business can deliver significant shareholder value by leveraging our market-leading expertise in delivering accretive M&A and realising material integration synergies. The Board continues to see M&A as a strategic priority going forward and a core part of the Group’s growth strategy.
This transaction will be funded from existing cash resources as we utilise our surplus cash and capital available for growth opportunities, while maintaining our balance sheet strength and resilience. The estimated key financial impacts are:
· c.£470 million of incremental long-term cash generation inclusive of cost and capital integration synergies
· c.£0.2 billion reduction in our Group Solvency II Surplus; pro forma of £5.1 billion as at 31 December 2021
· 7%pts reduction in our Shareholder Capital Coverage Ratio (‘SCCR’); pro forma of 173%2 as at 31 December 2021
· No change to our Fitch leverage ratio of 28% as at 31 December 2021
· Resilience will be maintained through hedging Sun Life UK’s market risks in line with Phoenix Group’s unique approach
Proposed dividend increase
The value and cash flow generated through this acquisition support a sustainable 2.5% inorganic increase in the Group’s dividend, to take effect from and including the 2022 Final Dividend, subject to completion. This demonstrates the significant value to shareholders of smaller, cash funded M&A.
Ahead of the Full Year results, the Board will assess if organic business growth delivered over the year can fund a further sustainable dividend increase for 2022.
In future years, we intend to simplify our dividend communications by announcing any dividend increase at the time of our Full Year results, which will combine both organic and inorganic growth, rather than providing separate dividend guidance on announcement of future M&A.
Commenting on the acquisition, Phoenix Group CEO, Andy Briggs said:
“The acquisition of Sun Life UK is highly attractive for Phoenix Group and demonstrates the significant value that smaller cash funded M&A transactions can deliver for our shareholders. We expect this acquisition to deliver incremental long-term cash generation of around £470 million, inclusive of cost and capital synergies. This supports a 2.5% dividend increase, in line with our ambition to sustainably grow our dividend over time.
We welcome the colleagues who will join us from Sun Life UK, and as the UK’s largest long-term savings and retirement business with a strong track record of closed book integrations, we look forward to offering a safe home for Sun Life UK’s customers over the long term. I am pleased that we will also be able to offer Sun Life UK’s customers access to our broad range of Standard Life products in our Open division.”