Just Retirement and Partnership Assurance agree £1.7bn all-share merger

Just Retirement shareholders will own roughly 60% of the combined group and Partnership the remainder after its shareholders receive 0.834 Just Retirement shares for each of theirs, valuing the group at £668.5m.

The deal, which has been backed by both boards and both companies' majority private equity shareholders, will be put to shareholder vote, as well as a proposal to raise £150m.

Just Retirement's chief executive officer Rodney Cook and finance director Simon Thomas will take the same roles in the enlarged group, with Partnership's current chief financial officer David Richardson taking the role of deputy group CEO, while the company's current CEO Steve Groves steps down.

The merger is expected to result in pre-tax cost savings of at least £40m per year by 2018 but are likely to require one-off integration costs of £60m over two years.

Both firms said the fundamental reforms to the UK annuities market introduced by the government in its 2014 budget – where pensioners were given greater access to their savings – had led to sales of the products falling by 42% from £11.9bn in 2013 to £6.9bn in 2014.

Both companies responded fairly promptly to the changes, reducing their respective cost bases and focusing on their defined benefit de-risking propositions, such that today defined benefit de-risking accounts for around half of the new business sales for both companies.

"This transaction represents a unique opportunity to accelerate the existing strategy of both businesses," said Just Retirement chairman Tom Cross Brown. "Our two businesses will be bigger, stronger and more efficient together, which we believe will allow us to deliver better returns to both policyholders and shareholders."

Partnership chairman Chris Gibson-Smith added: "Both businesses have at their core a focus on using outstanding intellectual property and underwriting expertise to deliver better value products and improved customer outcomes within defined benefit, UK retail retirement income and international markets."

Partnership also published first-half pre-tax profits down 81% but overall the results comfortably bested expectations, with new business, IFRS operating profits and MCEV NAV all ahead of the market's forecasts thanks to new sales of individually annuities increasing by over a third in the second quarter compared to the first.

Shares in PA surged almost 10% inititally to near 170p, taking them close to 17-month highs, on optimism the tie-up can deliver further value, before slipping back to nearer 160p by late morning.

Analyst Eamonn Flanagan at Shore Capital said: "We believe this deal makes enormous sense, with both private equity partners offering irrevocables. The cost savings are material and leave the merged group, post the equity raise, with the firepower to hit a market which we expect to grow considerably in the coming years."

Mike van Dulken at Accendo Markets said the price was not quite at the acquisition-like premium some investors might like to see, "but then again it’s not an acquisition", hence JRG shares were up as a merger is perceived to offer less risk.

"The sector still has plenty to deal with as it evolves from the March 2014 Budget news that UK pensioners would no longer be forced to buy an annuity, dealing a serious blow to both companies’ business models and sending their shares (and business written) lower by up to 50% and well south of their H2 2013 post-IPO highs, with smaller PA suffered markedly more."

"While both companies’ shares may have almost doubled since October, suggesting renewed optimism in the ‘new’ sector, the question is whether as a combined entity they can fare any better in terms of product innovation and adaptation to a markedly different market environment and deliver a recovery for shareholders, especially those in PA who have a way to go before recouping IPO losses."