Manulife has urge to merge with Canada Life

(December 9, 2002) The ranks of Canadian life insurance firms could grow thinner through another blockbuster merger proposal. Manulife Financial Corporation is bidding more than $6.4 billion to acquire Canada Life Financial Corporation, less than a year after Sun Life bought Clarica.

Manulife said today it wants to acquire all the outstanding common shares of Canada Life in a bid to become the country’s largest insurer by market capitalization.

“This announcement is consistent with our strategy as being a leading player in selected markets around the world. We believe this deal is financially attractive to Canada Life shareholders and reflects a full and fair value for their company, as well as providing them with the opportunity to participate in the future growth of the combined company at a very attractive price,” said Manulife president and chief executive Dominic D’Alessandro, in a conference call.

Canada Life common shareholders will be offered a choice of either $40 in cash or 1.055 Manulife common shares for each Canada Life common share, subject to certain conditions. The stock price of Canada Life closed at $31.45 on the TSX on Friday, while Manulife’s stock closed at $37.90 per share.

D’Alessandro said the bid would be one of largest business transactions in Canadian history. “With the transaction, we would create a Canadian-based global leader in the financial services industry.” (Click here to comment on the proposal.)

He also maintained that this is not a hostile takeover bid, but a disagreement over price.

“We prefer to categorize the transaction as unsolicited. We’re trying to avoid using the word ‘hostile.’ We’ve had discussions with Canada Life but their internal assessment of their market valuation for the company was not as advanced as we had thought,” D’Alessandro told analysts and reporters.

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In fact, Canada Life’s board has not endorsed the offer. “In my view, this proposal does not reflect the value of our company,” said Canada Life chair David Nield, in a statement. “We and our professional advisors are reviewing our strategic options.”

D’Allesandro said Manulife is offering a fair market price and he was not surprised by Nield’s response. “That’s what [Nield] has been telling me all weekend.”

Today’s announcement comes one year after Sun Life announced its ultimately successful $6.9 billion bid for Clarica. That deal ran into problems when a number of Sun Life producers balked at joining Clarica’s “captive” sales force. But D’Allesandro says that won’t be an issue this time around, since Manulife and Canada Life have similar independent distribution systems.

“So it’s unlikely any Canada Life producers would be disaffected as a result of our two companies coming together,” he said.

“I wonder how the Canada Life agents will react to this. An awful lot of those people sold whole life par. Canada Life was big in that, Manulife is not,” said Lawrence Geller, president of Geller Insurance Agencies in Campbellville, Ontario.

Geller noted that Manulife tended to drop most of the brand names and product lines of firms acquired in previous deals. He said he is concerned about the consolidation of providers of certain products, such as individual disability insurance, of which there are currently four providers, including Canada Life.

“The less competition in the market, the worse it is in terms of the number of choices to consumers,” he told Advisor.ca. He also wondered if Manulife would keep the Canada Life brand name, with its attendant goodwill in the industry and solid reputation for service to brokers.

Manulife said the combined company would rank first in individual life insurance sales in Canada, first in individual fixed annuity sales, first in group health sales, second in group pension contributions and second in group life sales. In the United States, the merged firm would be first among insurance companies for volume of new 401(k) defined contribution pension plans sold.

Canada Life and Manulife had combined premiums and deposits of $40.8 billion for the 12 months ended September 30, 2002. Total assets under administration of the companies were $191.9 billion at September 30. A combined entity would have operations in Canada, the United States, Asia and Europe.

Manulife says it will present details of the offer in the formal takeover bid and circular documents to be mailed as soon as possible. The offer will be open for acceptance for at least 60 days following the mailing. Manulife already holds a 9% stake in Canada Life.

Manulife expects to close the deal by the second quarter of 2003, pending regulatory approval. It could take two years to fully integrate the firms, with cost savings of around $200 million. D’Allesandro said the deal would likely result in job cuts due to “overlap and redundancy,” adding that most of the losses would come through attrition.

Many observers correctly predicted a round of consolidation in the Canadian life insurance industry in 2002. Apart from the Sun Life-Clarica union, other deals included Maritime Life’s takeover of Royal & Sun Alliance and Manulife’s purchase of Zurich Life.

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Filed by Jim MacDonald and Doug Watt, Advisor.ca, jmacdonald@advisor.ca.

(12/09/02)