Shares in British insurer RSA plummeted more than 20 per cent on Monday morning, after Swiss rival Zurich pulled out of a £5.6bn buyout deal just two days before a final deadline to formalise the takeover.
The BBC reports the decision, announced one day before a "put or shut up" deadline under UK takeover rules, was taken after the launch of a fundamental review of Zurich's general insurance business by new chief executive Kristof Terryn, who was appointed earlier this month.
The review follows a warning from the Swiss company that the August explosions at the Tianjin container port in northern China will cost it at least $275m (£177m) and push the business to a $200m (£129m) loss.
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A buyout had been seen as "an excellent exit route for long-suffering RSA shareholders", Barrie Cornes, an analyst at Panmure Gordon, told the Daily Telegraph. Instead, the company will have to continue "the tough job of delivering earnings from its reduced size" following the closure of loss-making divisions by boss Stephen Hester.
RSA was seen as particularly attractive to Zurich because it has a strong foothold in Scandinavia, would boost its presence in the UK's revitalised life and pensions market and because it would consolidate capital ahead of tough new rules coming in across Europe.
Shares in the British insurer were down more than 20 per cent at 405.5p, while Zurich was trading 1.4 per cent down on the Swiss market as a result of its weak profit guidance.
Zurich looks set to seal £5.6bn RSA buyout
25 August
Swiss insurer Zurich looks set to complete a buyout of British rival RSA, after it submitted a revised £5.6bn proposal on deadline day for a firm offer to be tabled and secured an extension to complete talks.
A 550p per share offer has now been put forward that would allow shareholders to "keep a 3.5p dividend which they were promised earlier this month", reports The Times. The management of RSA have indicated they would be "willing to recommend the transaction" and have requested an extension to 22 September of a "put up or shut up" deadline under Takeover Panel rules.
RSA shares rallied close to six per cent in morning trading and at Monday lunchtime were 4.5 per cent higher at 518p, still well short of the buyout offer. This, says the Financial Times, suggests "some dealers are cautious about the prospect of the deal being sealed" before due diligence is completed.
The Daily Telegraph says some will believe the price is low. "Some in RSA's camp had initially hoped for an offer north of 600p," the paper notes, while "research by Bernstein ahead of Tuesday's deadline found RSA shareholders viewed 572p as a suitable value". However, even at the final offer price the FT cites analysts saying the implied premium "is likely to lead to job cuts", especially in the UK where both have a strong presence.
Ultimately, activist investors "were eager not to allow the opportunity to slip away" and RSA, which is 18 months into a difficult turnaround, is unlikely to willingly walk away from a deal at a significant premium with a dividend sweetener. Zurich is keen to put a cash stockpile to work and is particularly attracted to its peer's strong position in Scandinavia.
Both company's issued statements that they can no guarantee a final offer will be forthcoming.
RSA rides high after Zurich confirms takeover talks
28 July
Shares in RSA, the UK general insurer best known in Britain for its More Than brand, jumped by 12 per cent on Tuesday morning after Swiss peer Zurich Insurance confirmed it was in talks over a potential takeover.
According to the Financial Times, sources close to the deal have indicated an offer could be pitched at about 550p a share, which would value the business at about £5.6bn. This would be significantly above the £4.45bn implied by Monday's closing price of 437.8 pence. Shares in RSA were up to more than 490 pence after more than an hour of trading on Tuesday, while Zurich was down two per cent to around 291 cents on the Swiss market.
The FT says the deal would be attractive to Zurich in large part because it would establish a stronghold in Scandinavian markets, where it would become the third largest operator. Paul De'Ath, an analyst at RBC, said "this is a relatively closed market with high profitability that would be attractive to any buyer".
Analysts at Bernstein added that the UK and Irish businesses would be the least attractive part of the tie-up, as Zurich already has a strong presence in these markets and some activities where it is not strong, such as motor insurance, are not desirable. However the Daily Telegraph points to statements from Zurich which suggest it would be interested in growing its UK life insurance activities following recent pension reforms which have made the market more lucrative.
The paper also highlights some of the more generic drivers for a deal, namely that large insurers across Europe are considering acquisitions as they prepare for the introduction of new European rules in January that require firms to set aside higher levels of capital in order to protect against market shocks.
Zurich has recently said it has $3bn (£1.93bn) in excess capital that it intends to use for consolidation. The insurance group has been linked with its British counterpart a number of times over recent years, notably following a scandal relating to the setting of premiums in RSA's Irish business that forced to it to inject £200m and led to a series of profit warnings.
A turnaround plan overseen by former Royal Bank of Scotland chief executive Stephen Hester helped reverse a £244m 2013 loss into a £275m pre-tax profit last year.
Tough times for RSA as pressure mounts on premiums
28 July
by Mark Dunne, Shares magazine
Profit warnings, accounting irregularities, shareholders forcing the removal of the chief executive, job losses and ditching the dividend. There's been more drama at general insurance provider RSA in the past 18 months than in Eastenders.
The group has operations across the world stretching from Latin America to Asia, employing 19,000 people. The home, motor, pet, marine and construction insurer, which trades as More Than in the UK, is working through a turnaround plan after a routine check of its Ireland business in late 2013 found that premiums had been overstated while claims were understated.
RSA had to inject £200 million into the division to stop it from collapsing and three profit warnings were subsequently issued.
The 300-year-old group's chief executive was voted out soon after, replaced by former Royal Bank of Scotland supremo Stephen Hester in February 2014.
Cost cutting, a £775 million rights issue and jettisoning non-core divisions helped reverse 2013's £244 million loss into a £275 million pre-tax profit in 12 months.
But not everyone is happy with the group's progress. In May this year, only two-thirds of RSA's shareholders backed the £2.8 million worth of shares Hester wanted as a bonus to complement his £950,000 salary.
The dividend was reintroduced after an 18-month hiatus in 2014 at 2p a share, far lower than the 6.5p expected by City analysts.
These are tough times for mainstream insurers as competition erodes pricing power by forcing premiums down, while low interest rates and bond yields have hit investment income. RSA made £439 million from reinvesting its premiums in 2014, an 11 per cent fall in 12 months.
But there was good news in the first quarter of this year with net written premiums increasing by 1 per cent to £1.5 billion year-on-year despite competitive pressures. Takeover talk constantly surrounds the business but a predator is unlikely to make a move until RSA shows better progress with its turnaround plan.
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