Aviva's streets ahead after £1bn RAC sale

The insurance group has offloaded the breakdown specialist to a private equity group - which should keep the City happy...

by Emma Haslett
Last Updated: 03 May 2012
It’s more of a gentle halt than an emergency stop to relations between Aviva and the RAC, which is about to be sold for £1bn to private equity firm Carlyle Group after a fierce bidding war. Aviva says it’s making the sale to enhance liquidity, but it’ll keep its commercial relationship with the RAC going by continuing to sell its break-down services. More importantly, it’s been forced to hang onto its £1bn pension fund, which it’s agreed to put £67m into to reduce a £160m deficit. So we know who got the better end of that deal…

The RAC is used to changing hands: since 1999, it’s gone from a being mutual fund owned by its members, to a plc owned by Lex services, to another plc, in 2005, when it was bought by Aviva. That £1bn price-tag is actually roughly what the insurer originally paid for it (although it has made another £500m by flogging various parts of the business over the years). Still, you can see why, with an £82m pre-tax profit and more than 7m customers, the RAC offers an attractive proposition to CG, past pasters at making assets sweat a little more freely.

Private equity groups are increasingly snapping up assets from banks and insurers at the moment, as financial organisations seek to meet stringent new capital requirements. And while, after various costs (including the £30m it will have to shell out to split the RAC away from the rest of the company) Aviva will apparently only make £600m out of the sale, it’s going to use the money to invest in more priority markets.

But although Aviva shares were up 1.2% this morning, which shows the City’s approval of the sale (in their eyes, Aviva shouldn’t have bought the RAC in the first place), that explanation clearly wasn’t enough. Analysts said they’d prefer Aviva to be explicit about exactly what it’s going to do with the proceeds of the sale. As Eamonn Flanagan from Shore Capital put it, ‘we suspect the market will only give Aviva full credit… once it becomes clear what it plans to do with the dosh.’ Time for a full MOT of Aviva’s finances, perhaps?

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