Kvika, TM and Lykill Merge

Today, the Boards of Directors of Kvika banki hf. (Kvika), TM hf. (TM) and Lykill fjármögnun hf. (Lykill) approved the merger of the three companies.

In recent weeks, the companies have held talks and conducted mutual due diligence. The companies’ Boards have reviewed their results and decided to merge the companies. Under the merger agreement approved today, TM will transfer its insurance operations to its subsidiary, TM tryggingar hf. This will be followed by a tripartite merger of Kvika, TM and Lykill. TM tryggingar hf. will subsequently become a subsidiary of the merged company.

The merger agreement contains the following conditions:

1. 1. 1. that the Financial Supervisory Authority (FME) grant its approval for the merger, cf. Art. 106 of the Act on Financial Undertakings, No. 161/2002;
      2. that FME grant Kvika approval to own a qualifying holding in TM tryggingar hf., TM líftryggingar hf. and Íslensk endurtrygging hf., cf. Art. 58 of the Act on Insurance Activities, No. 100/2016;
      3. that the Competition Authority does not invalidate the merger or impose onerous conditions, in the opinion of the merging parties, cf. Chapter V of the Competition Act, No. 44/2005;
      4. that shareholders approve the merger as provided for in Article 93 of the Act on Public Limited Companies, No. 2/1995, at legally convened shareholders' meetings of Kvika, TM and Lykill respectively; and
      5. that the transfer of TM's insurance portfolio to TM tryggingar has been carried out in accordance with the merging parties' existing proposals.

According to the merger agreement, TM's shareholders will receive, in return for their shares in TM, 2,509,934,076 shares in Kvika; this payment will be made with the issuance of new share capital. The number of issued shares in Kvika is currently 2,103,635,839 and therefore TM's shareholders will receive a 54.4% share of the issued share capital in Kvika, based on today’s issued share capital. Kvika may issue new share capital until the delivery date on the basis of the current contractual obligations which apply thereto and as a result this ratio may change prior to the delivery date.

The merged company will be a financially strong undertaking with a broad revenue base, that will be able to offer its customers a wide range of services in all major areas of financial and insurance services.

The companies' Boards consider it realistic to expect that the conditions of the merger agreement will be satisfied and that the companies will in fact be merged in the first quarter of 2021.

Structure and organizational chart

The Boards of Directors of the companies agree on the structure and organisational chart of the merged company. CEOs Marinó Örn Tryggvason and Sigurður Viðarsson will continue to serve in their positions. Marinó Örn Tryggvason will be CEO of Kvika and Sigurður Viðarsson CEO of TM tryggingar. Kvika's Finance and Operations division will be divided into two divisions following the merger. Ragnar Páll Dyer will be Managing Director of Finance while Ólöf Jónsdóttir, currently CEO of Lykill, will commence work for Kvika as Managing Director of its Operations and Development Division.

Significant cost synergies

The companies’ Boards consider it realistic to expect the merger to enable cost synergies of ISK 1,200-1,500 million annually, excluding transaction and one-off costs. Assessment of cost synergies has been based on the companies' budgets for 2021. The greatest share of the cost synergies is expected to result from more favourable financing, with the major portion of this expected to be realised in 2022.

A breakdown of the anticipated cost synergies by year is as follows:

• In 2021, the effect of synergies will be savings of ISK 500-600 million, while one-off costs will be ISK 250-300 million.
• In 2022, the effect of synergies will be savings of ISK 1,000-1,100 million, while one-off costs will be ISK 50-100 million.
• After 2022, the annual synergy effect will be savings of ISK 1,200-1,500 million and one-off costs insignificant.

In addition, other opportunities are expected to offer cost synergies, but these require further analysis after the merger. The companies' Boards also consider it realistic to expect the merger will enable the companies to increase their revenues.