M&A speculation boosts RSA

Comments from Zurich Insurance Group lead to largest jump in RSA shares in two decades.

City of London skyline
Source: Bloomberg

Initial interest in RSA from Zurich Group has seen expectations of a takeover increase. Subsequent comments that any offer for RSA would likely be all cash have helped push the insurance firm’s share price up to levels last seen back in 1998. When it comes to acquisitions of companies in the UK, the takeover rules state that Zurich will have 28 days to make a formal offer or it will have to drop the matter for six months unless RSA agree to an extension.

All of this comes less than a week before RSA is due to post its half-yearly earnings on Thursday 6 August. The expectations were for the adjusted earnings of £0.151, with sales of £3.452 billion leading to a pre-tax profit of £223.5 million. Prior to this announcement the average price target for the company had been 469p. Any final takeover price could be 100p higher than this figure even though the current share price is 517p, a two-decade high, and there may well be more upside for those willing to hold this all the way to a takeover.

The last couple of years have seen numerous issues surround RSA, with the Irish accounting scandal in 2013 leading to the departure of the CEO, and the well regarded ex-RBS head Stephen Hester taking over. Subsequently, the company has been embarking on cost-cutting and restructuring plans.

Any deal for RSA would give Zurich an increased foothold into the UK along with operations in South America, Canada and Scandinavia. It would also bring the liability of its pension deficit, currently a little more than £3 billion, which is a sizable amount for a company that might be acquired for around £5.7 billion. This has certainly been an issue for a number of other potential suiters, but for a company the size of Zurich it should be much more manageable.

Regardless of how this ends up, this is likely to be the catalyst for further M&A speculation in the insurance sector and could be the start of a round of corporate moves.

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