This $9.5 Billion Takeover Offer Looks Too Good to Refuse

(Bloomberg Opinion) -- A takeover offer that would have been so-so in February becomes impossible to refuse for a company whose shares have been hit by the pandemic. The 7.2 billion-pound ($9.5 billion) approach for RSA Insurance Group has been shrewdly pitched by the Canadian-Danish consortium trying to buy the FTSE-100 insurer.

RSA has been led by Stephen Hester since 2014. This particular chief executive role always seemed a little low profile for the former Credit Suisse Group AG investment banker, who previously took charge of Natwest Group Plc (then Royal Bank of Scotland) during the financial crisis. Few will be surprised that a good tenure would culminate in a deal.

The 685 pence-a-share price mooted by Toronto-based insurer Intact Financial Corp. and Denmark’s Tryg A/S is a 51% premium over RSA’s three-month average. Ordinarily, such terms would be hard for a board to reject and RSA says the price is acceptable — although some of the details, notably funding the pension, need resolving to transform what is currently a proposal into a binding offer.

Yet RSA shares have fallen sharply during the pandemic. That could provide some grounds for claiming the consortium is being opportunistic. The bid proposal, revealed by Bloomberg News, is a less appealing 18% premium to where the shares were in February. All the same, that remains a good outcome for shareholders. The coronavirus’s impact cannot simply be imagined away: The bill for claims on business continuity insurance remains uncertain. Other takeover targets have had to fight to get bidders to meet even their pre-Covid share prices. The price here equates to 15 times next year’s expected earnings, a valuation the shares haven’t traded at since 2016.

If a takeover on these terms looks like it’s worth more than the standalone option, the trickier question is whether there’s potentially a better alternative tie-up. RSA has long been talked of as a bid target. Zurich Insurance Group AG scrapped an attempted deal in 2015. RSA has remained independent because there aren’t many buyers who want its unusual bundle of U.K., Scandinavian and Canadian assets. Now that puzzle has been solved by bringing together a Canadian and Danish buyer in a joint bid, who would carve up the business between them.

There are other theoretical combinations. RSA’s domestic peer Aviva Plc is retrenching internationally to focus on the U.K., Ireland and Canada. But it’s hard to see how it could assemble an offer on its own with a comparable premium, let alone 100% in cash as here. The big European insurers — Allianz SE, Axa SA and Zurich — may not have as much firepower as one would imagine. Allianz on Friday scrapped a share buyback to conserve capital. These usual suspects may hesitate to enter a public auction against a consortium with plausible synergy potential when the starting price is already high.

RSA doesn’t have a firm deal yet. But at this level, it would be wise to dot the i’s and extract a binding offer here. And if there’s a better bid out there, let the market do the work of bringing it to the fore.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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