Friends Provident has few options in F&C stake sale

LONDON (Reuters) - Options look limited for Friends Provident as it considers offloading its majority stake in F&C Asset Management, though a break-up may be attractive to rival fund firms keen to beef up assets.

Selling the 140 year old investment firm has been made more difficult by volatile stock and credit markets, which have made the outlook for fund management companies less appealing and made potential buyers more reluctant to spend on big deals.

"They've couldn't have chosen a worse time to try to offload an asset manager," said a senior executive at a rival insurer.

While several firms have opted for private equity-backed management buyouts (MBOs) -- last year Jupiter was bought by TA Associates and Jupiter senior management, while in 2006 Hellman & Friedman Advisors backed Gartmore's management in an MBO -- the credit crisis has made private equity buyers more wary and finance harder to obtain.

"The preferred route would be an MBO. The only problem is that existing management are struggling to find appropriate finances at this time. I suspect they've made enquiries, but it's not a viable option at the moment," said Landsbanki analyst Samir Shah.

Hellman & Friedman is not interested in backing a management buyout at F&C, a source close to the buyout firm said.

Meanwhile, trade buyers, many of whom will be more concerned with keeping costs down and stemming outflows in current market conditions than hunting for a big deal, have so far failed to surface for F&C (FCAM.L), which cut its dividend and is part way through a turnaround plan to boost earnings and stop funds ebbing away.

Aberdeen Asset Management (ADN.L), whose track record of acquisitions means its name has topped the list of potential suitors for F&C, has said it is focused on bolt-on acquisitions, not large deals.

New Star NSAM.L, whose own shares have been battered in recent months, is not interested in any part of the group, and neither is Schroders (SDR.L).

"F&C has stated no-one has made an approach. That's worrying, given that rumours F&C was for sale have been in the marketplace for three months ... It means no-one is interested at the current market price," said Landsbanki's Shah.

BREAK-UP?

While F&C controls more than 100 billion pounds in assets, including the world's oldest investment trust, Foreign & Colonial (FRCL.L), and a strong ethical investment franchise, price may well be one of the key issues deterring bidders.

"The market is pricing in a bid premium that is not justified. The sector is valued at 12 times 2008 earnings, and F&C is on 20 times. I think 160 pence is a fair value for someone to be interested again," said Landsbanki's Shah. F&C's shares were at 178.25p around midday on Friday.

If interest in buying all of Friends' FP.L stake remains low, then the prospect rises of a break-up bid, for instance between fixed income and equities units, presenting an opportunity for rival fund firms to boost assets under management without committing themselves to too large an acquisition.

Such a deal could mirror Aberdeen's acquisition and break-up of Edinburgh Fund Managers in 2003, which it bought for 36 million pounds in shares, then immediately recouped 27 million pounds in cash and 6 million pounds in shares by selling on retail assets to New Star.

But two key uncertainties cloud F&C's sale prospects. The first concerns the intentions of investment firm Dawnay, Day, which increased its holding in F&C to 21.69 percent via contracts for difference this week.

It has declined to comment on its intentions, but may be interested in brokering a solution with another party such as Aberdeen.

The whole process could yet be upset by U.S. private equity firm JC Flowers, which has written a second letter to Friends Provident seeking talks on its future. Should it succeed in buying the life insurer, then sale plans for F&C would take a back seat.