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Aviva made 'right decision' with preference shares U-turn, analyst says


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Aviva made 'right decision' with preference shares U-turn, analyst says

Insurance group Aviva PLC made the "right decision" in abandoning controversial plans to cancel preference shares at par value, Macquarie analyst Andy Hughes said March 23.

The insurer dropped plans to redeem the shares after heavy criticism from holders and members of the parliamentary houses of Commons and Lords. The insurer revealed that it was considering the move when it announced its full-year 2017 results March 8, but ran into controversy because the shares are described as irredeemable and had been trading at a big premium to the £1 par value.

The value of the preference shares began to recover after dropping sharply following the announcement — the 8.75% shares were up 10.8% to 153.5 pence apiece as of just before 3:30 p.m. London time March 23. They had fallen to 128 pence March 8 from 174.5 pence the day before.

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Aviva's ordinary share price was down 2.2% at 492.9 pence as of just before 3:30 p.m.

"I think they have done the right thing now," Hughes said in an interview. "Had they gone ahead and done it, you could ask [how it would affect their reputation], but I think they have made the right decision in the end."

Hughes added that Aviva's intentions for the preference shares had struck analysts as odd: "I think everyone thought it was a bit strange. I was a little bit surprised — I think most people were — when they said they thought they could call [the shares] at par."

As well as avoiding a hit to its reputation, Aviva's U-turn could mean that it will use the funds that would have been consumed in redeeming the preference shares in buying back more ordinary shares. The company bought back £300 million of ordinary shares in 2017.

Aviva CFO Tom Stoddard told analysts at Aviva's results conference March 8: "To the extent that we don't do anything with [the preference shares], we still have our capital redeployment budget for this year and so that would imply a higher buyback." He added that "it would be natural for us to do something similar" to the £300 million 2017 buyback in 2018.

Hughes projected a larger buyback in the second half, adding that such a move might be more beneficial to the company than canceling the preference shares.

"They haven't said they are going to do a buyback, but if they do a straight share buyback, I think that is economically as good as, maybe even better than doing the preference shares," he said. "The preference shares still qualify for capital for nine years anyway so, by buying back the equity — I think the share price is undervalued at the moment — it gives you more upside on the equity valuation."

Aviva wanted to cancel the preference shares in part because from 2026, they will no longer count toward its capital base under the European Solvency II regime. They also pay high levels of remuneration to holders.

Aviva CEO Mark Wilson told analysts March 8 that the preference shares "are now just the equivalent of very expensive senior debt, with coupons that are not tax-deductible."

The company had not made a final decision whether to cancel the preference shares when it announced the plans, and Stoddard noted at the time that the matter needed to be handled with care. He told analysts: "We want to be very deliberate and careful in terms of how we approach them. And so we've been taking our time to work through what the possibilities are there and we're continuing to do that work now, so we haven't concluded on a specific action."

In announcing the decision not to go ahead with the cancellation, Aviva said it had received "strong feedback and criticism" and that it "has listened." It also noted that it "still plans to deploy £3 billion in excess cash in 2018 and 2019 to reduce hybrid debt, fund bolt-on acquisitions and buy back ordinary shares."