CAN CROMBIE CHECK PEARL'S AMBITION? Standard Life has come under

0 Comments | Sunday Herald, The, Nov 4, 2007 | by Kenny Kemp

!!CORRECTION!!

Please note that Pearl Group was working in consortium with Royal London not London Life as the articles below states.

THE gloves finally came off in the battle for insurer Resolution this week. Ever since Pearl Group director Hugh Osmond bought a small restaurant chain called Pizza Express with Luke Johnson and turned it into a gold mine worth GBP700 million, the former medical student has been an aggressive entrepreneur willing to fight hard for his success. Indeed, his pub chain was called Punch Taverns.

The pair eventually parted company, with Johnson later becoming the chairman of Channel 4, but Osmond had bigger bannocks to bake. Three years ago, he turned his attention to the insurance industry and a huge stash of savings known as zombie funds. He and his arch- rival Clive Cowdery, now the chairman of Resolution, have been the trendsetters in reviving what was a dormant investment backwater.

Last Thursday, Osmond's Pearl Group went on the offensive against Scotland's Standard Life in his bid to secure Cowdery's group, in which Pearl already holds a 24-per cent stake. It is seen as one of the biggest prizes of all, with its divisions of asset management and life and protection cover, including Scottish Provident and Scottish Mutual, and closed withprofits funds. Having launched a 720pper-share bid for Resolution, Pearl poured scorn on Standard Life's cash and shares bid, saying it was not only poor for shareholders but that it was even undermining the value of the Edinburghbased company.

Pearl, working in a consortium with London Life [see correction], the owners of Scottish Life and Bright Grey, even questioned Standard Life's business decisionmaking, claiming the insurer was going back on its strategy of growing organically, and said that its bid for Resolution "indicates you have problems with your business. Launching a dilutive, value-destructive bid is no way to deal with the problems. Nor is launching a bid which is undeliverable and which could only become more value-destructive if increased".

It all had shades of the other great recent Scottish takeover battle: Royal Bank of Scotland's tussle with Barclays for ABN Amro, where RBS chief Sir Fred Goodwin was able to secure the prize by paying cash, as opposed to Barclays's cash and shares offer. One of the many ironies in the current battle is that ABN Amro is financing Osmond's team.

Pearl's current 720p cash offer for Resolution shares offers a fixed value to shareholders of GBP4.94 billion. Standard Life's offer comprises 517p in cash and 0.715 Standard Life shares per Resolution share, giving Resolution shareholders approximately 18- per cent of the enlarged Standard Life and valuing the company at the same level. This also throws up the possible upside from any potential re-rating of Standard Life's shares from the current low rating of the UK life insurance market.

Pearl's outburst came 48 hours after Standard Life was rapped over the knuckles by the Takeover Panel. The panel found that the insurer was in breach of the Takeover Code by suggesting it might sweeten its bid. It was a silly mistake to make by saying that it "may improve its offer".

Pearl poured on more vitriol then, too, saying: "Standard Life looks like an uglier Friends Provident in disguise.

They went public because they ran out of cash, same as Friends. Their new business runs off the books almost as fast as they can write it, same as Friends." Mild-mannered Standard Life chief executive Sandy Crombie, his merchant bank chairman Gerry Grimstone and his team of advisers really didn't want to get involved in a war of words. But they couldn't just sit back and take such taunts. Crombie reassured investors that they were indeed the best home for the bulk of Resolution's business and said Pearl's comments were misleading.

"The acquisition complements Standard Life's strategy of organic growth by adding distribution, product breadth, customers and assets to manage. We can only presume that Pearl's behaviour is indicative of their eagerness to acquire significant value for them. We believe our acquisition represents a better fit with Resolution.

Pearl's action simply reinforces our conviction in the substantial value we can create, " asserted Crombie.

STANDARD Life joined forces with Swiss Re to bid for Resolution. Crombie has his eye on the Resolution Asset Management business, which is managed from Glasgow and has GBP50 bn under management. This would sit snugly with Standard Life's own investment arm, based in Edinburgh. Standard Life would also gain a secure foothold in the protection and critical illness sphere, where it has stumbled, and this would come with the Scottish Provident brand. For Crombie, another target is the lucrative annuity market for all those Scottish Provident and Scottish Mutual customers who are now heading towards retirement.

As far as the zombie funds are concerned, Standard Life would sell the closed funds to Swiss Re for an agreed GBP2.35bn. Further gains may also accrue from the halo effect on the enlarged Standard Life's return from the synergies and increased financial gearing that is expected to result from the acquisition of Resolution.