11th Aug 2009 07:08
11 August 2009
RESOLUTION LIMITED
Registered Office: Trafalgar Court, Les Banques, St Peter Port, Guernsey, Channel Islands
Company Number: 49558
Unaudited results for the 6 months to 30 June 2009
Resolution's objective is to unlock value through acquisitions and restructuring in financial services. Its first project focuses on UK life assurance and asset management.
In a separate statement today, Resolution announced that it had agreed the terms of a recommended acquisition of Friends Provident Group plc.
Results:
Net assets were 97.2 pence per share at 30 June 2009 (31 December 98.4 pence). Total invested funds were £644.8 million (31 December £652.6 million).
The loss of £7.3 million related to operating expenses and due diligence costs on transactions that did not lead to an acquisition. This was after an investment return on the invested funds of £3.1 million.
Michael Biggs, Chairman of Resolution Limited, commented:
"We have brought forward the release of our half-year results to coincide with the announcement of the recommended acquisition of Friends Provident Group plc , which commences our restructuring project in UK life assurance."
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Enquiries: |
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Michael Biggs, Resolution Limited |
+44 (0)1481 745 368 |
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Investors / analysts |
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Steve Riley, Resolution Operations LLP |
+44 (0)20 7016 9085 |
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Media |
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Alex Child-Villiers, Temple Bar Advisory |
+44 (0)7795 425 580 |
Note: The 2008 statutory accounts have been audited by Ernst & Young LLP and their report was not modified or qualified. This announcement does not constitute statutory accounts.
Forward-looking statements
The preliminary announcement contains certain forward-looking statements with respect to Resolution Limited and its outlook. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. Nothing in this announcement should be construed as a profit forecast.
Website
www.resolution.gg
Chairman's statement
The first 6 months of 2009 was a very busy period for Resolution. Having obtained its UK listing towards the end of 2008, the first half of 2009 was the first trading period during which the Company started to implement its strategy of creating value for its shareholders through the acquisition, restructuring and disposal of financial services companies in the UK and Western Europe.
The Company was pleased to announce on 8 May that the FSA had closed a brief investigation into certain members of the Resolution Operations LLP team and myself relating to our former positions as directors of Resolution plc (now Pearl Group Holdings (No. 1) Limited). We are confident that the investigation did not impact on the financial results of the Company during the first six months of the year.
Prior to securing its listing, the Company had evaluated the market environment in the main sectors of the financial services industry and concluded that, initially, the most likely opportunities to create value for shareholders would rest in the UK life assurance and asset management sectors.
The Company believes the UK life and asset management market is fragmented with too many sub-scale businesses unable to produce rates of return sufficient to reward investors adequately. Resolution's analysis also suggests that the market has, to its detriment, diversified away from the product offerings where it has had traditionally unique customer propositions - protection, annuities, collective savings for retirement and capital guaranteed investments - into the retail savings market where it is difficult to conclude that the sector has a competitive advantage. Public market investors in life assurance companies have neither enjoyed the steady long-term returns produced by the run-off of the in-force business nor benefited from higher returns on new business written necessary to compensate investors for the risks to which they are exposed. The agency costs associated with management of these businesses being empowered to re-cycle returns from the in-force business into supporting new business growth has, in our view, been one of the main reasons why life assurance shares have underperformed the market as a whole over a prolonged period.
Resolution intends, through acquisitions, to focus on creating a business with scale and a strong presence in the risk and collective savings markets and, once its restructuring and consolidation activity has been accomplished, to offer investors a choice of investment security where the returns, risks and duration are clear and well understood enabling different types of investors to meet their particular investment objectives.
During July 2009, the Company started discussions with the board of Friends Provident Group plc (Friends Provident) with a view to Friends Provident becoming Resolution's first acquisition in its life assurance consolidation and restructuring project. These discussions have led to the Friends Provident board today recommending to its shareholders an offer by Resolution. The terms of the offer are set out in detail in the joint announcement made to the market today. The Board believes that the acquisition of Friends Provident is consistent with the Company's mid-teens percentage target return in aggregate over the medium term from its restructuring projects and in particular that Friends Provident brings:
An attractive franchise which can benefit from consolidation;
An experienced management team;
Efficient and scalable systems;
A strong capital position; and
A good fit with future possible acquisitions.
When the Company floated in December last year, it said that it intended to seek to move from a secondary to a primary listing at the time of its first acquisition. The Company is confident that on completion of the Friends Provident acquisition, it will be admitted to the primary list of the UK Listing Authority. The Company anticipates that as a consequence it will become part of the applicable stock market indices permitting a broader range of public market investors to participate in Resolution's restructuring plans.
While the acquisition of Friends Provident is an important stepping stone in the Company's consolidation plans, we remain in close dialogue with a number of other potential vendors of life assurance businesses which we expect to lead to further transactions and the realisation of those plans on behalf of public market investors.
MN Biggs
Chairman
Operating and financial review
Overview of results
Resolution Limited was admitted to trading on the main market of the London Stock Exchange in December 2008. The amount of cash raised was £649.6 million after charging initial expenses of £10.4 million in connection with the listing. Details of the Company's activities in the first half of 2009 are given in the Chairman's statement. As no acquisition was completed during the half year trading period, the Company continued to receive an investment return on the funds which were also used to meet operating expenses.
The Company was incorporated on 9 October 2008 and prepared its first financial statements for the period from that date to 31 December 2008. Consequently, these are the first interim statements presented by Resolution Limited. The comparative financial information presented in this report covers the period from incorporation to 31 December 2008 although income and expenses mainly relate to the period from the listing in December 2008.
The Company made a loss before and after tax for the half year of £7.3 million (2008: loss before and after tax £0.7 million). Total comprehensive income for the period was a loss of £7.8 million (2008: loss £0.2 million). Net assets per share at 30 June 2009 were 97.2 pence.
The Company has adopted a cautious approach to the investment of its funds, as discussed later in this review, and at the end of the period approximately 74% of the total invested funds of £644.8 million were held in short term UK treasury bills, with the balance held in other short term investments. This approach, combined with the currently prevailing low interest rate environment, results in the investment return for the period being £3.1 million.
Operating expenses for the half year were £10.4 million (2008: £0.7 million) of which £6.2 million reflected the regular cost of operations and the balance of £4.2 million was in respect of due diligence on potential acquisition opportunities where the Company did not proceed with the acquisitions. The regular cost of operations included £5 million paid and payable to Resolution Operations LLP under its operating agreement with the Company. Costs related to the proposed acquisition of Friends Provident are not included in these figures as they were mainly incurred after the end of the reporting period.
Friends Provident Group plc
On 11 August 2009 the Company announced that it had agreed the terms of a recommended acquisition of Friends Provident. The acquisition is subject to, amongst other things, certain conditions including:
approval of a scheme of arrangement under Part 26 of the Companies Act 2006 (as amended) and related resolutions by the requisite majorities of Friends Provident shareholders at the consequential scheme meeting and Friends Provident extraordinary general meeting;
the sanction of the scheme and confirmation of an associated capital reduction by the High Court;
admission of the new shares to be issued in connection with the acquisition to the Official List of the UK Listing Authority and to trading on the London Stock Exchange's main market for listed securities; and
the transfer of the Company to a primary listing under Chapter 6 of the listing rules made by the UK Listing Authority.
The acquisition is also subject to other conditions, including regulatory consents, customary for a transaction of this nature.
The acquisition values Friends Provident, as at the close of trading on 7 August 2009, at £1.858 billion. The consideration for the transaction is a combination of cash, up to a maximum of £500 million, and the issuance of new shares by the Company. The cash element will be paid from the Company's own resources as no new amounts of cash are being raised in the transaction. In addition, the costs of the acquisition will be funded from existing resources.
Corporate governance
Currently, compliance with the model code is being observed by the Board on a voluntary basis. Following the Company's move to a primary listing, upon completion of the acquisition of Friends Provident, the provisions of Chapters 10 and 11 of the listing rules (relating to transactions and related party transactions) will apply in full to the Company. The Board will be responsible for taking all proper and reasonable steps to ensure compliance with the model code by the directors.
Invested cash
Under the terms of the proposed acquisition, the Company expects to use up to £500 million of the invested cash to acquire shares in Friends Provident. Any surplus cash remaining after funding the transaction and the related costs will continue to be invested in accordance with the existing investment mandate.
The Company's investment mandate remains unchanged from that set out at the time of the listing and at the year end and is described in detail in the prospectus and year end financial statements. In summary, the objective is to provide security of capital, liquidity and, subject to these constraints, a competitive investment return by investing in a diversified portfolio of short-term securities, instruments and obligations. The securities must have a short-term credit rating of at least A1/P-1 (or its equivalent) from a recognised credit rating agency at the time of purchase and at least 80 per cent of the investments must be maintained at a credit rating of A1+/P1 (or its equivalent). Treasury bills are to have a maximum maturity of six months and 100 days in the case of all other investments.
Dividend policy
The Company expects that returns for shareholders will be derived primarily from the capital appreciation of its ordinary shares and the returns of proceeds from disposals. While this expectation has not changed, the Company recognises that a large number of Friends Provident shareholders value the dividend that has historically been paid by Friends Provident. Accordingly, the Company has reviewed its previous policy not to pay dividends and intends to commence paying dividends assuming and following completion of the acquisition.
Friends Provident has declared a second interim dividend of 1.3p per Friends Provident share in respect of 2009 and this will be paid by Friends Provident prior to completion of the acquisition. The Company currently expects to pay a final dividend of 2.72p per Resolution share in respect of the second half of 2009, assuming completion of the acquisition and that the financial performance of Friends Provident is in line with expectations. Thereafter, the Company expects to pay a dividend of 4.08p per Resolution share, representing an aggregate amount of approximately £90 million per annum, in respect of each subsequent year, subject to the acquired Friends Provident business being able to support this level of dividend. The Company expects that one-third of this dividend will be paid as an interim dividend in respect of the first half of each year and two-thirds of this dividend will be paid as a final dividend in respect of the second half of each year. The Company is not paying an interim dividend in respect of the first half of 2009.
In setting its dividend policy, the Resolution Board is targeting an aggregate dividend of £90 million per annum over the enlarged group shareholder base. The proposed dividend payment per share has been calculated on the basis that the maximum amount of cash in the offer (£500 million) is paid to Friends Provident shareholders under the scheme of arrangement so that 630 million Friends Provident shares are exchanged for cash and the remaining 1,710 million Friends Provident shares currently in issue will be exchanged approximately for 1,539 million Resolution shares. There are currently 660 million Resolution shares in issue. On this basis the number of Resolution shares in issue immediately following completion of the acquisition is expected to be 2.2 billion.
Directors' responsibilities
We confirm to the best of our knowledge that:
the condensed set of financial statements has been prepared in accordance with IAS 34 as adopted by the European Union
the interim report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7, namely important events that have occurred during the period and their impact on the condensed set of financial statements, as well as a description of the principal risks and uncertainties faced by the company and the undertakings included in the consolidation taken as a whole for the remaining six months of the financial year.
The interim report includes a fair review of material related party transactions and any material changes in the related party transactions described in the last annual report as required by Disclosure and Transparency Rule 4.2.8.
By order of the Board,
Director
11 August 2009
Independent review report to Resolution Limited
Introduction
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30th June 2009 which comprises the Consolidated statement of comprehensive income, Consolidated statement of financial position, Consolidated statement of changes in equity, Consolidated statement of cash flows and related notes 1 to 12. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the company in accordance with guidance contained in ISRE 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.
Directors' Responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30th June 2009 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
Ernst & Young LLP
London
11 August 2009
Consolidated statement of comprehensive income
for the half year ended 30 June 2009
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Half year ended 30 June 2009 |
Period from 9 October 2008 to 31 December 2008 |
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Notes |
£m |
£m |
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Net investment income |
3.1 |
- |
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Net income |
3.1 |
- |
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Administrative expenses |
3 |
(10.4) |
(0.7) |
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Total operating expenses |
(10.4) |
(0.7) |
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Loss for the period |
(7.3) |
(0.7) |
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Other comprehensive income: |
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Available-for-sale financial assets |
(0.5) |
0.5 |
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Other comprehensive income (net of tax) |
(0.5) |
0.5 |
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Total comprehensive income for the period |
(7.8) |
(0.2) |
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Loss attributable to: |
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Owners of the parent |
(7.3) |
(0.7) |
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Non-controlling interest |
- |
- |
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(7.3) |
(0.7) |
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Total comprehensive income attributable to: |
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Owners of the parent |
(7.8) |
(0.2) |
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Non-controlling interest |
- |
- |
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(7.8) |
(0.2) |
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Earnings per ordinary share |
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Basic earnings per ordinary share (pence) |
8 |
(1.10)p |
(0.11)p |
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Diluted earnings per ordinary share (pence) |
8 |
(1.10)p |
(0.11)p |
Consolidated statement of financial position
as at 30 June 2009
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30 June 2009 |
31 December 2008 |
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Notes |
£m |
£m |
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ASSETS |
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Current assets |
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Available-for-sale |
6 |
644.8 |
652.6 |
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Trade debtors and other receivables |
0.1 |
0.1 |
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Cash and cash equivalents |
0.2 |
1.3 |
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Total assets |
645.1 |
654.0 |
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EQUITY AND LIABILITIES |
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Equity attributable to equity holders of the parent |
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Share capital |
7 |
649.6 |
649.6 |
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Retained loss |
9 |
(8.0) |
(0.7) |
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Capital reserves |
9 |
- |
0.5 |
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Total equity |
9 |
641.6 |
649.4 |
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Current liabilities |
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Trade creditors and other payables |
5 |
3.5 |
4.6 |
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Total liabilities |
3.5 |
4.6 |
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Total equity and liabilities |
645.1 |
654.0 |
Consolidated statement of changes in equity
for the half year ended 30 June 2009
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Half year ended 30 June 2009 |
Period from 9 October 2008 To 31 December 2008 |
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£m |
£m |
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Equity at start of period |
649.4 |
- |
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Issue of share capital for cash, net of transaction costs |
- |
649.6 |
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Total comprehensive income |
(7.8) |
(0.2) |
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Equity at end of period |
641.6 |
649.4 |
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Consolidated statement of cash flows
for the half year ended 30 June 2009
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Half year ended 30 June 2009 |
Period from 9 October 2008 to 31 December 2008 |
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£m |
£m |
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Cash flows from operating activities |
(7.3) |
(0.7) |
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Movements in operating assets and liabilities |
2.8 |
0.6 |
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Net cash flows from operating activities |
(4.5) |
(0.1) |
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Cash flows from investing activities |
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Purchase of investment securities |
(6,853.3) |
(658.2) |
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Disposal of investment securities |
6,860.6 |
6.1 |
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Net cash flows from investing activities |
7.3 |
(652.1) |
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Cash flows from financing activities |
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Proceeds from issue of ordinary share capital, net of transaction costs |
(3.9) |
653.5 |
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Net cash flows from financing activities |
(3.9) |
653.5 |
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Net (decrease)/increase in cash and cash equivalents |
(1.1) |
1.3 |
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Cash and cash equivalents at the beginning of the period |
1.3 |
- |
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Cash and cash equivalents at the end of the period |
0.2 |
1.3 |
Note: Cash and cash equivalents is comprised of bank and cash balances only
Notes to the consolidated financial statements
1. Basis of preparation
The condensed consolidated interim financial statements for the half year ended 30 June 2009 have been prepared in accordance with IAS 34 "Interim Financial Reporting". This interim financial information has been prepared in accordance with accounting policies adopted in respect of the financial statements for the period ended 31 December 2008, as updated by changes that are intended to be made in the full year 2009 financial statements as a result of changes to International Financial Reporting Standards. In particular, the Group has applied the provisions of IAS 1 "Presentation of Financial Statements (Revised)" the principal impact of which is to require the introduction of a statement of comprehensive income.
The presentation currency of the Group is sterling and has been rounded to the nearest £0.1 million.
The following new standards and amendments to standards are mandatory for financial year beginning 1 January 2009.
IAS 1 (revised) Presentation of financial statements. The revised standard prohibits the presentation of items of income and expenses (that is 'non-owner changes in equity') in the statement of changes in equity, requiring 'non-owner changes in equity' to be presented separately from owner changes in equity. All 'non-owner changes in equity' are required to be shown in a performance statement. Entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). The Group has elected to present one statement: a statement of comprehensive income. The interim financial statements have been prepared under the revised disclosure requirements.
IFRS 7 (amendment), 'Financial instruments disclosure'. The amended standard requires additional disclosure in respect of fair value measurements recognised in the statement of financial position in the 2009 year end/financial statements.
The following new standards, amendments to standards and interpretations are mandatory for the financial year beginning 1 January 2009, but are not currently relevant for the Group;
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IAS 23 (revised), 'Borrowing costs' |
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IFRS 2 (amendment), 'Share-based payment' |
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IAS 32 (amendment), 'Financial instruments: Presentation' |
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IFRIC 13 'Customer loyalty programmes' |
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IFRIC 15 'Agreements for the construction of real estate' |
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IFRIC 16 'Hedges of a net investment in a foreign operation' |
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IAS 39 (amendment), 'Financial instruments: recognition and measurement |
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IFRS 8 'Operating segments', replacing IAS 14 'Segment reporting'. |
The IASB has issued the following standards and interpretations which are effective for periods beginning on 1 July 2009. The Group has decided to adopt these standards and interpretations where early adoption is permitted but there is no financial impact on these interim financial statements. The impact of adopting them is not expected to have a material effect on the results of the Group. IFRS 3 (revised): Business Combinations, IAS 27: Consolidated and Separate Financial Statements, (Amendments) IAS 28 Investments in associates and IAS 31 Interests in joint ventures.
The company was incorporated on 9 October 2008 and prepared its first financial statements for the period from that date to 31 December 2008. Consequently, comparative amounts in the consolidated statement of comprehensive income and consolidated statement of cash flows cover this period and comparative amounts in the statement of financial position are as at 31 December 2008.
The comparative figures for the period to 31 December 2008 are derived from the statutory accounts for that period. The auditors' report on those accounts was (i) unqualified, (ii) did not include reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 237 (2) or (3) of the Companies Act 1985.
2. Segmental reporting
The Group has only one reporting segment being the corporate segment.
3. Administrative expenses
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Period from 9 October 2008 to 31 December 2008 |
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Half year ended 30 June 2009 |
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£m |
£m |
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General corporate expenditure |
6.2 |
0.7 |
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Due diligence expenditure |
4.2 |
- |
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Total administrative expenses |
10.4 |
0.7 |
4. Taxation
The Group is resident for tax purposes in Guernsey and is subject to the company standard rate of tax in Guernsey at zero per cent.
5. Trade creditors and other payables
|
30 June 2009 |
31 December 2008 |
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|
£m |
£m |
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Accrued expenses |
3.5 |
4.6 |
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3.5 |
4.6 |
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6. Financial assets
|
30 June 2009 |
31 December 2008 |
||||
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Cost |
Fair value |
Cost |
Fair value |
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Available-for-sale |
£m |
£m |
£m |
£m |
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Short term investments |
644.8 |
644.8 |
652.1 |
652.6 |
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Total available-for-sale investments |
644.8 |
644.8 |
652.1 |
652.6 |
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7. Share capital
The authorised share capital of the Company is represented by an unlimited number of ordinary shares of no par value.
|
30 June 2009 |
31 December 2008 |
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Issued and fully paid |
Number |
£m |
Number |
£m |
|
|
At beginning of period |
660,000,000 |
649.6 |
- |
- |
|
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Share of no par value issued fully paid on incorporation |
- |
- |
1 |
- |
|
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Shares of no par value issued for cash on initial public offering |
- |
- |
599,999,999 |
600.0 |
|
|
Shares in respect of over-allotment |
- |
- |
60,000,000 |
60.0 |
|
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Transaction costs, net of income tax |
- |
- |
- |
(10.4) |
|
|
At end of period |
660,000,000 |
649.6 |
660,000,000 |
649.6 |
All ordinary shares in issue in the Company rank parri passu and carry the same voting rights and rights to receive dividends and other distributions declared or paid by the Company.
8. Earnings per share
The earnings per share have been calculated on the basis of the profit and weighted average number of shares in issue, as set out below.
|
Period from 9 October 2008 to 31 December 2008 |
||||
|
Half year ended 30 June 2009 |
||||
|
£m |
£m |
|||
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Net loss for the period |
(7.3) |
(0.7) |
||
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Weighted average number of ordinary shares for basic earnings per share |
660,000,000 |
638,181,818 |
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Weighted average number of ordinary shares for diluted earnings per share |
660,000,000 |
638,181,818 |
9. Statement of changes in equity attributable to equity holders of parent
|
Share |
Retained |
Capital |
|||||
|
capital |
loss |
reserves |
Total |
||||
|
£m |
£m |
£m |
£m |
||||
|
At start of period |
- |
- |
- |
- |
|||
|
Net loss attributable to equity holders of parent |
- |
(0.7) |
- |
(0.7) |
|||
|
Unrealised gain on investments available-for-sale |
- |
- |
0.5 |
0.5 |
|||
|
Issue of share capital, net of transaction costs |
649.6 |
- |
- |
649.6 |
|||
|
For the period ended 31 December 2008 |
649.6 |
(0.7) |
0.5 |
649.4 |
|||
|
Net loss attributable to equity holders of parent |
- |
(7.3) |
- |
(7.3) |
|||
|
Realisation of investments available-for-sale |
- |
- |
(0.5) |
(0.5) |
|||
|
For the half year ended 30 June 2009 |
649.6 |
(8.0) |
- |
641.6 |
10. Related party transactions
The Company has entered into certain contracts with related parties as described below.
An operating agreement with Resolution Operations LLP, as a result of which the Company has outsourced most of its operating functions to Resolution Operations LLP. This agreement has, subject to certain conditions, a minimum term of 5 years. Under this agreement the Company will pay an annual fee based on the value of the Company (subject to a minimum payment of £10 million) to Resolution Operations LLP. An amount of £5 million has been included in administrative expenses in the financial statements in respect of amounts charged by Resolution Operations LLP for the period;
RCAP Guernsey LP, a partnership in which the members of Resolution Operations LLP are limited partners, acquired shares in the Company for a consideration of £20 million in the initial public offering. The Company has entered into a lock-up deed with RCAP GP Limited, acting in its capacity as general partner of RCAP Guernsey LP, restricting the sale of the shares held by RCAP Guernsey LP for a period of three years;
The Company has a 99.99% interest in, and is the general partner in, Resolution Holdco No 1 LP, a Guernsey limited partnership. The limited partners in this partnership are RCAP Guernsey LP and RCAP Investments SARL. The Company has entered into the partnership agreement with these parties for the purpose of making acquisitions of financial services businesses; and
A trade mark licence agreement with Resolution (Brands) Limited, a company wholly owned by a partner of Resolution Capital Limited, under which the Group has agreed to pay a fee of £100,000 per annum for the first year of the licence, with the fee increasing each year thereafter in line with any increase in the retail price index.
11. Risk management
The principal risk is related to the investment of the Company's cash holding which amounted to £644.8 million at 30 June 2009. This risk is managed through the Board-approved investment mandate which the Company has agreed with the investment manager. The investment objective is to provide security of capital, liquidity and, subject to these constraints, a competitive investment return. This is achieved by investing in a diversified portfolio of short-term securities, instruments and obligations, which may, under the mandate, only include certificates of deposit, commercial paper, medium-term notes, variable rate notes, bank deposits, bankers' acceptances, government bonds, treasury bills, and corporate bonds. Investments can only be in securities denominated in sterling or that are fully hedged back into sterling. The securities must have a short-term credit rating of at least A1/P-1 (or its equivalent) from a recognised credit rating agency at the time of purchase and at least 80 per cent of the investments must be maintained at a credit rating of A1+/ P1 (or its equivalent). Investments are restricted to securities which have a maximum maturity of six months in the case of treasury bills and 100 days in the case of other investments.
All of the investments are valued on a market bid basis and are invested in sterling-denominated investments. Of the total, £474.3 million is invested in UK treasury bills which are therefore subject principally to market risk with the balance of £170.5 million held in corporate bonds and certificates of deposits in accordance with the above mandate and therefore subject to both market and credit risk; £170.5 million is therefore the maximum exposure to credit risk. Due to the short-term nature of the investments it is not appropriate to present a sensitivity analysis as any such market risk would not be material.
Following the announcement of the proposed acquisition of Friends Provident Group plc, the risks related to this transaction will be included in the related prospectus when it is published.
12. Post balance sheet events
On 11 August 2009 the Company announced that it had agreed the terms of a recommended acquisition of Friends Provident Group plc (Friends Provident) . The acquisition is subject to, amongst other things, certain conditions including:
approval of a scheme of arrangement under Part 26 of the Companies Act 2006 (as amended) and related resolutions by the requisite majorities of Friends Provident shareholders at the consequential scheme meeting and Friends Provident extraordinary general meeting;
the sanction of the scheme and confirmation of an associated capital reduction by the High Court;
admission of the new shares to be issued in connection with the acquisition to the Official List of the UK Listing Authority and to trading on the London Stock Exchange's main market for listed securities; and
the transfer of the Company to a primary listing under Chapter 6 of the listing rules made by the UK Listing Authority.
The acquisition is also subject to other conditions, including regulatory consents, customary for a transaction of this nature.
The acquisition values Friends Provident, as at the close of trading on 7 August 2009, at £1.858 billion. The basic terms of the acquisition will provide Friends Provident shareholders with:
a cash amount of 79.4 pence per share for up to the first 2,500 Friends Provident shares held by each holder (subject to the total amount of cash not exceeding £500 million); and
0.9 of a Resolution share for each Friends Provident share for the remainder of the holdings of each Friends Provident shareholder.
The total cash to fund the acquisition and the number of shares to be issued cannot be determined at this time as this will depend on whether Friends Provident shareholders opt for cash (where no more than 2,500 shares are held), shares or a combination of both.
Related Shares:
FLG.L