(Bloomberg) -- Manulife Financial Corp., Canada’s largest life insurer, strengthened its hold on the market with a deal to acquire one of its biggest competitors while bolstering assets and returning capital to shareholders.

Manulife agreed to buy Standard Life Plc’s Canadian business, the fifth-largest life insurer in the nation, for about C$4 billion ($3.7 billion), the Toronto-based insurer said yesterday in a statement. It’s Manulife’s second-largest acquisition, after the $10.9 billion purchase of John Hancock Life InsuranceCo. in 2004.

The transaction builds on “Manulife’s growth strategy for its Canadian business -- in particular wealth and asset management,” Chief Executive Officer Donald Guloien, 57, said on a conference call. The acquisition enhances the company’s ability to increase its dividend, pushes it beyond a goal of C$4 billion in core earnings by 2016, and adds 3 cents annually to earnings per share over the next three years, he said.

Standard Life shares surged as much as 10 percent, the biggest intraday gain in more than three years, and were up 9.5 percent at 422.60 pence at 8:14 a.m. in London. They have increased about 17 percent this year.

The deal will bolster Manulife’s assets of C$637 billion. The company already boosted its dividend last quarter. It was the first of Canada’s largest life insurers to do so since 2008, signaling a return of the company to pre-financial-crisis strength.

Step Forward

Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto, called the purchase agreement “a step forward” for Manulife.

“This says they’re financially strong and moving ahead,” said Nakamoto, whose firm manages about C$4.7 billion including Manulife stock. “This was an opportunistic purchase. If you see a block of business up for sale, if you don’t take it someone else will.”

Standard Life, based in Edinburgh, also said it will return cash to shareholders through the deal. The U.K. insurer said it will return 1.75 billion pounds ($2.9 billion), or 19 percent of the insurer’s market value, once the transaction is complete. Standard Life said the purchase will add to earnings, without giving a specific figure.

Asset-Management Operation

Standard Life CEO David Nish, 54, has been working to build the asset-management operation while reducing reliance on businesses that require more capital. The firm has C$52 billion in assets under management in Canada.

“The sale allows us to realize fully the value of the business for our shareholders,” Nish said in a statement.

As part of the deal, Manulife agreed to offer Standard Life Investments funds to clients in Canada, the U.S. and Asia. Standard Life Investments said the transaction will at least triple the amount of its funds that are sold by Manulife in the next three years. The figure was $5.6 billion in the first half of this year, the company said.

Standard Life Investments said it plans to set up an office in Toronto for institutional clients after the deal is completed and that its Boston office will become the hub for its North American business.
Earlier this year, the European insurer added to its money- management unit by agreeing to buy Ignis Asset Management from Phoenix Group Holdings, bringing in 59 billion pounds of client funds.

Bidding Process

Standard Life put its Canadian unit up for sale a few months ago in a bidding process, Guloien said on the conference call. The deal valued the business at 19.5 times estimated 2014 operating earnings, Standard Life said on a conference call.

Manulife said it will pay for the unit with equity and debt. Caisse de Depot et Placement du Quebec, the second-largest pension fund in Canada, said it invested C$500 million to help fund the deal. That brings Caisse’s total Manulife investment to more than C$1 billion.
The Canadian insurer said it will issue C$1.6 billion in equity for the purchase. The rest of the price will be funded through “internal resources,” and future sales of debt or preferred shares are possible, the company said.

Manulife expects the deal to close in the first quarter of 2015 and the integration to cost about C$150 million in the first three years, according to the statement.

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