British insurance company Aviva plans to buy Friends Life for $8.8 bn

British multinational insurance company Aviva Plc is planning to buy smaller rival Friends Life for £5.6 billion ($8.8 billion).

''The boards of Aviva and Friends Life note the recent press speculation and confirm that they have reached agreement on the key financial terms of a possible all share combination of Aviva and Friends Life,'' the London-based company said in a release.

Friends Life has indicated to Aviva that it is willing to recommend the key financial terms of the deal to its shareholders, subject to reaching agreement on the other terms and conditions of any offer and the completion of mutual due diligence.

A merger of Aviva and Friends Life would create the UK's largest insurance, savings and asset management business by number of customers and a net worth about £20 billion ($31.4 billion).

Under the terms of a potential deal, Aviva would acquire the entire ordinary share capital of Friends Life at an exchange ratio of 0.74 Aviva ordinary shares for each Friends Life ordinary share.

Friends Life closed at 347.70 pence yesterday night, giving the London-based company a market value of about £4.9 billion.

The possible offer will also be structured so that Friends Life shareholders would receive an amount in cash equal to any Friends Life final dividend payment for the 2014 financial year.

Based on Aviva's closing share price on 21 November 2014, the possible offer will be valued at approximately 398.9 pence per Friends Life, representing a premium of 15 per cent to Friends Life's closing share price on 21 November 2014.

Under the terms of the possible Offer, Friends Life shareholders would own approximately 26 per cent of the enlarged group.

With Friends Life's 5 million customers and Aviva's 11 million, the potential merger would create a leading insurance and savings company in the UK with 16 million customers.

The transaction is also expected to lead to a substantial increase in profits and assets under management at Aviva Investors through the addition of Friends Life's UK assets under management.

The combined business would have leadership positions across key product areas and be better positioned to take advantage of the evolving UK life insurance market with greater capacity to invest and innovate.

Friends Life is the fifth-largest life and pensions company ranked by UK market capitalisation and operates from seven countries around the world, including the UK, Germany, Luxembourg, Dubai, Singapore, Hong Kong, and the Isle of Man.

Friends Life was founded as Resolution Limited by entrepreneur Clive Cowdery in 2008 and changed its name to Friends Life Group in May 2014.

The London Stock Exchange-listed company acquired AXA Sun Life Holdings Ltd from AXA SA in early 2010 and Bupa Health Assurance in late 2010.

Under the UK takeover rules, Aviva must make a firm offer by 19 December or walk away for at least six months.