London: Aviva failed to see off bid speculation despite rejecting rival British insurer RSA’s £5 billion ($7.81 billion) cash offer for core non-life units.
Some analysts said RSA might have to raise its offer by several hundred million pounds if it really wanted Aviva’s general insurance businesses in the UK, Ireland and Canada.
“We think such a deal could make strategic sense. There would be significant overlap in the UK, Ireland and Canada and where RSA would have market-leading positions,” UBS said in a research note.
RSA said it remained open to talks with Aviva but declined to comment on whether it might raise its offer.
“RSA considers that its proposal represents fair value for the target businesses and would be in the interests of both sets of shareholders,” RSA said in a statement, adding the deal could generate £300 million in annual cost synergies before tax.
Aviva — Britain’s second-biggest life insurer by market capitalisation which in 2006 had an abortive attempt at buying Britain’s biggest listed insurer, Prudential Plc — said it told RSA on 6 August that it felt the offer was unacceptable.
“Given the compelling strategic and financial benefits to Aviva shareholders of retaining the GI Business, its upside potential and the terms offered by RSA, the board was unanimous in rejecting this proposal,” said Aviva chairman Colin Sharman, who got the offer in a letter from RSA chairman John Napier.
Aviva also pointed out that a 21% rise in half-year operating profit showed it was in good shape.
Sharman, a Liberal Democrat peer at the House of Lords, is a trained accountant who spent most of his career at KPMG.
Aviva’s general insurance operations had a 2009 operating profit of around £1 billion pounds — roughly half of the group’s overall operating profit of around £2 billion.
RSA said it was offering around 9.8 times earnings and 1.6 times net assets for the Aviva businesses it targets.
Aviva shares were down 1.1% at 383.2 pence by 1212 GMT, giving the company a market capitalisation of around 10.8 billion pounds. RSA fell 1.4% to 125.6 pence, giving RSA a stock market value of around £4.3 billion.
“Although there would be benefits in undertaking such a transformational deal...it looks clear that RSA would have to offer well above 5 billion, leaving management open to accusations of acting against the best interests of shareholders,” said brokerage Killik & Co.
Shareholders put aviva under pressure
Goldman Sachs said in a research note that RSA’s offer price equated to around 10 times Aviva’s estimated 2010 group earnings. Goldman added that the RSA bid was a positive for Aviva shareholders and kept a “conviction buy” rating on Aviva.
RSA’s bid for the Aviva businesses would have been funded by a rights issue underwritten by BNP Paribas, Deutsche Bank and HSBC.
Its bid overtures to Aviva are the latest consolidation attempt in the world’s insurance industry.
Prudential Plc scrapped a record $35.5 billion bid for AIG’s Asian unit AIA this year while UK insurance buyout vehicle Resolution clinched a deal to buy AXA’s UK life insurance arm.
Resolution, which reports half-year results on Wednesday, declined to comment on the Aviva situation.
One major Aviva shareholder said there were potential synergies in a tie-up between RSA and Aviva.
The investor, who asked not to be named, made the comment to Reuters on Sunday following media reports that investors were unhappy that Aviva rejected the bid without consulting them.
“We felt there were potential synergies in a deal of that nature,” the shareholder said, without commenting further.
The Sunday Times said some shareholders sought a strategic review of Aviva which could include calls for a break-up, while the Sunday Telegraph quoted unnamed shareholders as saying the decision not to consult them risked souring relations.
Aviva’s top three institutional shareholders — Blackrock, Franklin Templeton and Legal & General -- all declined to comment on the situation on Monday.