Zurich’s interest in buying RSA cools approaching deadline

Published: August 24, 2015

Updated: July 24, 2018

Author: Luke Jones

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The Zurich Insurance Group was expected to expand its operations in Canada with the purchase of the RSA Insurance Group, although the deal is now unlikely to happen until 2016 if at all.

British held RSA (formerly Royal and Sun Alliance) has been the subject of a potential Zurich takeover from last month, but fresh doubt has been cast on the deal in recent weeks. Any purchase of RSA would be among the largest insurance deals in European history and would also create the biggest insurance entity in the British Isles.

As well as bolstering its European market, Zurich is hoping a buy-out of RSA will help to expand its operations in Canada, where RSA enjoys reasonable market coverage.

However, while Zurich first flagged its interest in RSA to the market on July 28, the company has not followed with a bid and the deadline is set for Tuesday. If Zurich misses that deadline it will have to wait six months before being able to engage again, unless RSA asks for an extension.

While it seems Zurich is still mulling over the deal, the company is probably going to make a lowball bid for RSA to automatically extend the deal. RSA is almost certainly going to reject that offer, but it will give investors and advisers more time to thrash out what will be the actual deal moving forward. Despite Zurich’s obvious interest, RSA investors are unlikely to be buoyed as no bumper pay day is imminent.

The company has recently started a so far successful turnaround plan under former Royal Bank of Scotland boss Stephen Hester, but uncertain interest rates in the future make the company a hard sell. Essentially Zurich is the only company interested in purchasing RSA and without a bidding rival the Swiss company is likely to expect a lowered deal.

Zurich is thought to be considering a deal of 525-550 pence per share for RSA, which would result in an US$8 billion buy-out, but with RSA’s share price currently trending downwards (492 pence) Zurich could offer a lowball bid. RSA, for what it’s worth, is holding out for some 600 pence per share, a deal Zurich investors are extremely unlikely to accept. Indeed, some backers of the $47 billion valued company are even wary about the low end estimate for RSA.

“We expect an offer before the deadline, and have spoken to the company several times and told them not to overpay,” said a top-10 investor in Zurich, adding a deal at 525 pence was “bearable” with 510 pence “preferable.”

It seems top investors in Zurich are not turned on by the idea of purchasing RSA, even if it could mean expansion in Canada and Latin America. Many backers would prefer management to return surplus capital to investors and leave the RSA deal alone.

“I am somewhat disappointed by Zurich’s approach to RSA,” said Andrea Williams, senior fund manager for European equities at Royal London Asset Management, a Zurich shareholder.

“I got the impression that the desire was to use the excess capital via buybacks or higher dividend and thus return it to shareholders and was not aware that a large deal was contemplated.”