Is the RSA takeover a done deal?

The board of RSA (RSA) has now formally recommended the 685p-a-share takeover offer bid from international rivals Tryg and Intact. Having already rallied when news of the deal broke on 5 November, the general insurer’s share price moved to 672p on the update.

That marks a 3 per cent discount to the combined take-out price and a promised 8p-a-share dividend.

Though the takeover premium looks healthy, and is the largest in the European insurance sector in a decade, shareholders nonetheless face a dilemma: cash out now at a small discount, or hope the deal completes on time in the second quarter of 2021 (or faces a rival bid), against a backdrop of profound market uncertainty?

Long-term investors have every reason to feel nervous. In 2015, shares in the FTSE 100 firm rallied sharply on news of a 550p proposal from Zurich Insurance, only to crash back to earth when the offer was later scrapped.

Though terms have at least been agreed this time round, the Tryg-Intact offer looks far more complicated. Structured as a consortium bid, it involves more than 18 teams of professional advisers, including seven banks, as well as three different legal codes and submissions to multiple regulatory authorities.

Under the terms of the proposal, Intact will take RSA’s Canadian, UK and international operations while Tryg will absorb divisions in Sweden and Norway. RSA’s Danish business is also set to be split.

This means that at least four competition clearances are required, as the transaction is set to result in either Tryg or Intact increasing their market shares in Canada, Sweden, Denmark and Norway. Though a small army of lawyers has been instructed to anticipate any challenges from antitrust authorities, these matters are notoriously difficult to predict, as the LSE’s bid for Refinitiv has shown.

Due diligence, the bane of all M&A, is also complicated by the multiple time zones and the fact that all meetings are still being conducted remotely. Insiders on both sides point to Intact and Tryg’s deep familiarity with RSA’s business in 80 per cent of the markets in which it operates as a plus.

Other hurdles lie ahead, the first of which is approval from RSA shareholders. Here, at least, the signs are encouraging. After first being contacted by the consortium in August, chief executive Stephen Hester and his team are understood to have insisted that independence would not be sacrificed “unless it was for real value”, according to one insider on the deal.

That appears to have been enough to win the backing of 15 per cent shareholder Cevian Capital, which has already provided irrevocable undertakings on the deal. And while the timing of the offer meant shareholders missed out on the Pfizer vaccine bounce by a few days, this has not altered the board’s view on value.

This doesn’t mean the offer is unprecedented, even if earnings forecasts for the broader sector have been hit by lower interest rates in recent years. Indeed, at 1.8 times’ net assets, the consortium is getting the stock at a less-impressive 20 per cent premium to the FactSet-compiled five-year average, despite RSA posting record underwriting profits in three of its last four years.

Analyst reaction also suggests plenty has been left on the plate for the Canadian and Danish bidders. “If you take into account potential cost synergies we believe RSA could achieve a valuation of 850p,” said analysts at RBC in a note to clients last week.

The flipside to this is that the chances of a rival bid are unlikely, even if RSA has been a perennial takeover target for several years. Though a bid from private equity, Zurich or another insurance giant could yet emerge, they would need to raise at least £7.2bn at a time of heightened market uncertainty.

That’s not to imply the bidco’s own financing is a done deal yet, either. While Intact has confirmed that it has “all of the equity financing” needed to fund its £3bn portion of the deal, Tryg shareholders still need to approve a rights issue to secure the £4.2bn needed for the transaction to complete.

Again, the early signs here suggest this will be a formality. TryghedsGruppen, the foundation which owns 60 per cent of Tryg’s shares, intends to back the DKK37bn (£4.4bn) fundraising once various court approvals have been received. But capital markets have proved fickle many times this year, and could become unnerved again.

On balance, it is the cumulative effect of each of these factors, rather than one stand-out obstacle, which should focus minds in the weeks and months ahead. Investors should keep all of them in mind as they await documents. Hold at 672p.

Last IC View: Hold, 670p, 6 Nov 2020