Shares of UK insurer Aviva Plc (ADR) (NYSE:AV) (LON:AV) are off more than 5% in trading in London on Monday after the company announced on Friday after the close it had reached a preliminary agreement to acquire rival Friends Life Group Ltd (LON:FLG). Shares of Friends Life are up over 7% on the news.

The board of directors of Friends Life Group voted on Friday night to recommend the Aviva deal assuming other conditions could be agreed on and the merger passed due diligence. Of course, the transaction must also be approved by UK regulatory authorities.

UK Insurer Aviva Plc To Acquire Rival Friends Life Group

Details on Aviva – Friends Life deal

The terms of the preliminary agreement call for Aviva to pay 0.74 shares of Aviva Plc (ADR) (NYSE:AV) (LON:AV) for each share of Friends Life Group Ltd (LON:FLG). When you do the math, that comes out to a price of around £3.98 per share of Friends Life, or about £5.6 billion ($8.8 billion) based on Friday’s closing price. The almost £4 offer represents a 28% premium above the average share price of Friends Life over the last three months.

Shareholders of Friends Life would end up owning about 26% of the new merged firm.

Deal would create insurance behemoth

Of note, the merger would create UK’s largest life insurance firm, with more than 16 million insureds. If the deal is finalized, it will produce a life insurance and asset management business valued at over £20.7 billion with more than £300 billion in assets under management.

Statement from Aviva

Aviva Plc (ADR) (NYSE:AV) (LON:AV) said in a statement on Friday it believes the deal will lead to a “substantial increase in profits and assets under management” at Aviva Investors, its asset management unit, and will also create  “significantly higher cash flows,” largely through synergies leading to cost savings.

“The combination would accelerate the transformation of Aviva’s balance sheet, including reducing leverage and strengthening capital and liquidity,” Aviva noted in its statement. “These benefits are expected to increase the enlarged group’s financial and strategic flexibility and support further growth of Aviva’s dividends.”