Insurance giant Resolution - which a year ago merged with the Birmingham-based Britannic Group - has agreed to buy the life insurance business of Abbey bank for £3.6 billion in a deal that will double its size and propel it into the FTSE 100 blue-chip share index.
Resolution, Britain's sixthlargest listed life insurer with a market value of £2.5 billion, said it would fund the acquisition with a £1.54 billion rights issue, debt and the release of surplus capital within the Abbey businesses.
Yesterday's deal will cement Resolution's position as the biggest consolidator in Britain's life insurance industry, giving it seven million customers with invested assets of £63 billion.
The company has grown rapidly on the back of acquisitions such as the UK arm of Swiss Life and the closed life insurance operation of Royal & Sun Alliance.
It also marks a shift away from Resolution's focus on closed life funds, which no longer write new business, as Abbey's portfolio includes open books.
Abbey, which will gain access to Resolution's customers through a distribution deal, said it would concentrate on its banking business after the sale and had no plans for any British acquisitions in the near future.
Reports have named Abbey's parent Santander as a potential buyer for UK bank Alliance & Leicester, long seen as a takeover target.
"This transaction delivers on our stated strategy of consolidating life insurance inforce portfolios and does so in a way that substantially increases our business. In fact it more than doubles its scale on several key measures," said Resolution chairman Clive Cowdery.
He added that the deal met Resolution's internal targets for the performance of any acquired business and gave it the scale to look at further expansion.
"It very much benefits Resolution's capability for looking at future acquisitions," he said.
Resolution said its planned, fully underwritten issue of up to 350 million shares would be priced between 440 and 520 pence a share.
The deal is priced within market expectations and just below the Abbey business's embedded value, an industry measure of worth, of £3.77 billion.
Mr Cowdery said the figure, 97 per cent of embedded value, would improve to 87 per cent after £1.5 billion of excess capital was released from Abbey's life businesses, largely through an intragroup loan.
In the past, buyers of such books achieved hefty discounts to embedded value, but with other suitors indicating their interest and Santander in no rush to sell, Resolution had not been expected to get a significant markdown.
Analysts had expected Resolution to pay between £3.5 billion and £4 billion for the UK and offshore life businesses: Scottish Mutual, Scottish Provident and Abbey National Life.
"They appear to be paying about embedded value, with not much for the new business, which looks fine," said analyst Kevin Ryan at ING in London.
"It's clearly a transformational deal. The Resolution management gets very high ratings. But whether they have the management further down and the breadth to cope with this, I don't know," he said.
Resolution expects annual pretax cost synergies of £10 million by the end of 2008, with asset management operational synergies of £7 million in 2007.
The insurer added that the acquisition would increase its dividend capacity.
However, no major job losses or redundancies are expected.
Resolution said a former RSA operation in Liverpool, employing around 100 people, would close with its responsibilities transferred to the former Britannic site at Wythall.
"The two main administrative centres in Glasgow and Birmingham will be run as normal for the foreseeable future," said Resolution's chief executive Paul Thompson.