Pearl’s takeover of Resolution: a cautionary tale of a mega-deal too far

Like many of the largest deals of 2007, Pearl’s £5bn hostile takeover of Resolution seems like a relic of a bygone age.

It was highly leveraged – Pearl owner Hugh Osmond took on more than £2bn of debt to fund his bid.

There were rival bidders aplenty, with insurers Standard Life, Friends Provident and Swiss Re all entering the fray at different times, leading to a scramble for mandates by City firms.
And, like other mega-deals from the M&A boom, it is now starting to unravel in the face of the global economic meltdown.

The five-month takeover battle between the two zombie life assurance funds ended in November 2007, but it staggered on until well into 2008 before being approved by shareholders and regulators.

Even now, the deal refuses to lie down and die. Pearl is struggling under a mountain of debt built up during the acquisition, and the Financial Services Authority (FSA) is carrying out an investigation into former Resolution owner Clive Cowdery and other company executives over their conduct during the takeover.

Which means that lawyers are back at the negotiating table two years after the bid was first launched.

Last month Simpson Thacher & Bartlett, which advised Pearl on financing the original deal, was instructed again as Osmond weighs up how to tackle the company’s £3bn debt. Finance partner Stephen Short led the team in 2007.

Ashurst is in prime position to advise the lending banks on any restructuring, having represented Lloyds TSB, Dresdner Kleinwort and Royal Bank of Scotland on the original deal.

Meanwhile, Cowdery has re-launched Resolution from the ashes of the Pearl takeover, and appears to have left behind his ­previous legal advisers. When he floated the new company late last year, he turned to Slaughter and May’s Jeff Twentyman instead of Herbert Smith, which advised on the Pearl deal.

Herbert Smith did win a place acting for financial advisers Citigroup and Lazard on the IPO, but Cowdery’s snub was a blow for the firm nonetheless.

Both Slaughters and Herbert Smith were key corporate advisers for Cowdery before the merger as Resolution grew by swallowing up other life assurance funds.

Herbert Smith acted on deals to buy assets from Abbey in 2006 and Britannic Group in 2005, with corporate partner Malcolm Lombers leading the relationship.

But it only won the Pearl job because Slaughters was conflicted out and it is unclear whether Herbert Smith will be able to revive its relationship with the new Resolution.

The early signs are not good. Cowdery looked to Lovells in 2008 when he attempted to buy a stake in Bradford & Bingley, although Herbert Smith would have been ruled out anyway by its role acting for the stricken mortgage lender.

And, according to those close to the situation, Slaughters is advising Cowdery on the FSA investigation.

This is the second time the deal has come to the attention of ­regulators. Back in 2007, the FSA investigated whether sensitive information had been leaked to the press.

“When you consider all the law firms, accountants and banks, you could have 500 people who know about the deal. Sometimes you sit there thinking, that was a convenient time for this to leak,” says one lawyer close to the situation.

But while the first investigation came to nothing, the second one will set alarm bells ringing for the advisers.

The latest probe is understood to centre around the change-of-control application, which allows the FSA to approve the new owners of a financial institution.

This process normally takes around three months, but the Pearl deal took nearly seven months to complete.

The regulator has refused to comment on any of its investigations but, while it rumbles on, Cowdery’s new Resolution fund is severely hamstrung.

It raised £600m from shareholders in December 2008 but is unable to bid for some of the prime assets that are coming onto the market until the FSA has finished its probe.

“It’s terrible for them. Their business is doing deals. Clive must be thinking, ‘Come on FSA’,” says one insurance partner.

In spite of the fallout, Pearl’s takeover of Resolution remains a memorable transaction for the lawyers involved.

Simmons & Simmons partner Richard May lined up alongside some of corporate law’s biggest names, advising Royal London Mutual Insurance on its agreement with Pearl to take on the active parts of the life assurance business.

“A transaction of this kind, combining a large contested offer for a regulated financial institution and the transfer of assets to a third party, is a rare thing,” he recalls. “Considerable care was required to structure and document Royal London’s involvement in the transaction.”

Part of the reason the deal attracted so many column inches was the clash of two big personalities: Osmond and Cowdery.

They had contrasting backgrounds Osmond rose to prominence developing restaurants and pubs, while Cowdery was an insurance executive but they shared a desire to dominate the market.

And both must now be ruing their involvement in a deal that turned out to be symptomatic of a period where too many risks were taken by too many individuals.

“This was a battle to be number one in this sector,” says a City insurance partner. “I think they got carried away. Ultimately, this is hubris.”

THE ORIGINAL PLAYERS

Pearl
Freshfields Bruckhaus Deringer corporate partner William Lawes. Simpson Thacher & Bartlett finance partner Stephen Short

Resolution
Herbert Smith corporate partner Malcolm Lombers

Lending banks
Lloyds TSB, Dresdner Kleinwort and Royal Bank of Scotland Ashurst

Royal London
Simmons & Simmons ­corporate partner Richard May

Friends Provident
Linklaters corporate partners David Cheyne and Owen Clay

Standard Life
Clifford Chance corporate partner Adam Signy

Swiss Re
Skadden corporate partner John Adebiyi