Could RSA approach be blessing in disguise for Aviva?

The markets don't seem to like Aviva's business model. RSA's £5bn break-up bid might change that...

Last Updated: 23 Jun 2011

Since when did insurance get so interesting? The latest row concerns UK insurer Aviva, which is in hot water with its shareholders after admitting that it didn't even bother to consult them before rejecting a £5bn bid from rival RSA for its UK & Ireland insurance business last month. Any deal would be pretty tricky - RSA would need to raise more cash than it's currently worth, and after the Pru debacle, that's a big ask. But investors still seem convinced that Aviva would be worth more if it was broken up into its constituent parts. Perhaps the hefty valuation placed on the smaller bit of its business - which suggests the company as a whole is under-valued - will force the stock market to think again?

Aviva is one of the few insurers to have life assurance and general insurance arms, and the stock market doesn't seem to think much of it; there are constant rumours about potential break-up bids to unlock more value for shareholders (many of whom own shares in the like of RSA too), while its share price has been in the doldrums for a while now. Hence why, according to today's papers, some of its biggest institutional shareholders are up in arms about its immediate dismissal of the RSA offer. At 10 times the division's profits, the price represents a decent opening gambit, and these big investors seem to think Aviva should at least have had the conversation, rather than sending RSA packing with a flea in its ear. Which is perhaps not unreasonable.

On the other hand, this deal would be a lot easier said than done. RSA was apparently planning to finance the deal via a rights issue. But at around £5bn, this would be one of the largest cash-calls in UK history - RSA itself only has a stand-alone value of just under £4.5bn, so this deal would more than double its size. And after what happened to the Pru, it might be hard to sell that to investors; although this might be less complicated culturally than the Pru's far Eastern expansion plan, there are still huge risks attached to any deal as transformational as that. (And who knows what would happen to those never-ending Paul Whitehouse ads?)

But that's not why Aviva turned it down. It insists that its two-pronged model actually makes it more stable and financially sound, and that its shares are currently undervalued. And this bid suggests it has a point. It currently has a stock market valuation of about £11bn - yet broker Oriel Securities reckons the bit RSA wants to buy only accounts for about a third of its value, suggesting its market cap should be closer to £15bn (assuming RSA isn't massively over-paying, and that doesn't seem to be the consensus). It also said the market was at the bottom of its cycle, making this a bad time to sell.

Still, the good news for Aviva is that there's nothing like a bit of takeover interest to boost your share price, particularly if it highlights a possible under-valuation. Maybe all this attention on its business model will actually help CEO Andrew Moss to convince the market of its merits? 

In today's bulletin:
Could RSA approach be blessing in disguise for Aviva?
BT apprenticeship scheme gets more applications than Oxford
Regrets, I've had a few - Sir Alan Budd rues OBR impartiality row
Britax avoids crash - as Saga/AA losses soar
MT Expert's Top Ten Tips: Be more emotionally intelligent

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