- Offer of 685p is 48 per cent above Thursday’s opening price
- Deal follows a rash of foreign takeovers of UK insurers
The board of RSA (RSA) is “minded to recommend” a 685p-a-share all-cash bid for the company from a consortium of rivals, in the latest sign of buoyant corporate activity within the insurance market.
The FTSE 100 group, which has been led by former Royal Bank of Scotland chief executive Stephen Hester since 2014, said it received an approach on 2 October from Canada’s Intact Financial and Danish peer Tryg. Under the terms of the proposal, RSA's divisions would be split up, with Intact taking the Canadian, UK and international operations and Tryg absorbing divisions in Sweden and Norway.
Intact and Tryg also plan to co-own RSA’s Denmark business.
The offer is priced just above the shares’ post-financial crisis high-point of 683p, and a 24.5 per cent premium to the offer tabled by Zurich in its failed takeover attempt in 2015. If it goes through, the £7.2bn deal would also be the largest acquisition of a listed UK company this year.
Though the deal requires a formal offer to be made by 3 December, full shareholder backing from all three parties and two separate financings, RSA told the market it had “indicated to the consortium that it would be minded to recommend the proposal, subject to satisfactory resolution of the other terms of the possible offer, including a period of due diligence”.
Shareholders will also receive an 8p per share interim dividend, after the group followed many of its peers in suspending distributions with its 2019 full-year results.
The approach marks the third overseas bid for a major UK insurer in the last two years. Later this month, Hastings (HSTG) will complete its £1.7bn sale to a consortium bid from Finnish insurer Sampo and South Africa’s Rand Merchant. Like Hastings, rival LV= also suffered from claims inflation before it was acquired alongside L&G’s (LGEN) general insurance business by German insurance giant Allianz at the start of 2020.
On balance, we think shareholders should accept the offer - assuming it matches the terms indicated - which is unlikely to be bettered by a rival party, and implies Intact and Tryg expect to generate substantial synergies from the tie-up.
That doesn’t mean the valuation is unprecedented, mind: at 1.4 RSA’s tangible net assets, the consortium is getting the stock at a discount to the five-year average. Third quarter results – published hours before the bid was revealed – were another reminder of the firm’s underwriting strength. Covid-19 claims aside, the combined operating ratio improved to 90 per cent.
In appearing to greenlight the offer, RSA may feel that the task of asset-liability management is getting ever trickier in an era of ultra-low interest rates. Against this backdrop, scaling up and reducing costs makes a lot of sense for general insurers, despite all the risks and complications that come with integration and all big M&A. For this transaction to close, RSA shareholders still need Tryg and Intact to complete a rights issue and a private placing, respectively.
The broader question for the sector is who might be next. The size of this offer suggests a bid for Aviva (AV.) – whose stock closed up 1.5 per cent on the RSA news – is not inconceivable, though recently-appointed chief executive Amanda Blanc is more likely to be encouraged by the prospect of selling non-core international divisions for at least their book value. That in turn might help finally help the serial underperformer’s rating edge closer to the RSA deal premium.
Last IC View: Buy, 420p, 31 Jul 2020
