Aviva confirmed on Monday that it hadn’t given so much as the time of day to the recent £5bn offer from RSA for its general insurance business — for reasons that were probably strategically prudential.
But, well, other arguments against the deal were probably plain Prudential, too.
As Oriel Securities notes, far from sewing Aviva up, RSA’s offer has just renewed focus on the insurer’s understated value instead (emphasis ours):
In our opinion the approach highlights the serious undervaluation of Aviva shares. The £5bn is nearly half of Aviva’s market cap of £11bn while GI In our opinion represents around one-third of the value in the group. In our opinion this highlights that the equity is worth more than £15bn…
What this also highlights is that Aviva could probably sell all of its operations for considerably more than the enterprise value of the business. This may increase calls for Aviva to break itself up which would only put upwards pressure on the share price.
Plus there’s Aviva’s own argument that it expects a swift rebound in its general insurance lines after restructuring them, so there’s no point selling at the bottom.
(Although that also means there’s no point in RSA waiting around for a second bid. Nor much point for any potential break-up suitors to wait much longer, either.)
Plus — and although we’re getting into counterfactuals here — even if RSA had got agreement on a deal (or gets one later), actually carrying it out would still look like risky stuff.
Because as Oriel also noted of RSA’s post-bid prospects:
We are surprised by the scale of the proposed deal and note that RSA would need to raise more than its market capitalisation (currently £4.4bn) to complete this transaction. It is also slightly at odds with RSA’s stated strategy of making small bolt on acquisitions to generate growth…
Hmm, heard that one before?
Yes, you guessed it. The long shadow of the Pru strikes again:
The timing of RSA’s offer could be considered shrewd as many general insurance markets are close to cyclical lows and this could be an opportune time to purchase these businesses at a discounted valuation (this point is clearly made in Aviva’s statement this morning). However, we also suspect the timing of the deal would suffer from some investor scepticism towards transformational deals in the insurance sector following Prudential’s failed offer for AIA.
Harvey McGrath and Tidjane Thiam have a lot even more to answer for.
Update (1300 BST) — RSA shoots back (emphasis ours):
RSA has for some time considered that the combination of RSA and the Target Businesses would make strong strategic sense. The proposed transaction represents in-market consolidation in geographies and lines of business that RSA knows well and in RSA’s view, would give rise to significant cost synergies estimated at £300 million per annum pre-tax. RSA also believes that the resulting two strongly capitalised businesses, focused on life and general insurance respectively, would be in the interests of both sets of shareholders…
Related links:
Prudential – Lex / FT
Déjà vu all over again in the UK insurance sector – FT Alphaville