Rivals are circling Royal Bank of Scotland’s insurance arm as a bid deadline approaches, but aside from Zurich Financial Services, few may have the desire and firepower to buy Britain’s largest motor insurer.
RBS Insurance was put on the block last month as part of the bank’s plan to shore up its balance sheet, alongside a 12 billion pound ($24 billion) rights issue.
The insurer is an eye-catching asset — one of the most efficient players in a cut-throat market, and home to attractive brands, including Direct Line and Churchill. It’s expected to fetch between 6 billion and 7.5 billion pounds.
But financial pressures on a sector battered by the credit crunch, the ultra-competitive UK market and the sheer size of the business is likely to cool many suitors from going beyond the first round, due to close on May 28.
RBS is keen to seal a sale by September or soon after, people familiar with the bidding process have said.
Britain’s second biggest bank has signalled it would prefer to sell the unit as a whole, though it could hive off joint ventures, including its deal with supermarket giant Tesco and Linea Directa, with Spain’s Bankinter.
“Apparently there is a lot of interest. In reality, you can whittle it down,” one source close to the bidding process said.
Likely bidders in the first round are Zurich, Generali and Allianz in Europe; Allstate, Travelers and AIG in the United States; and China’s Ping An, according to people familiar with the situation.
Analysts and people close to the situation expect strong interest in the first, non-binding, round of bids, but say that is likely to drop sharply for the second round, with Zurich seen as the most serious contender, followed by its European rivals.
“My view is the kind of price tag RBS has attached to RBS Insurance is beyond the capacity, let alone the willingness, of many of the insurance companies that would be obvious buyers,” said one insurance industry analyst, who declined to be named.
WHO’S BUYING?
U.S. buyers for RBS are seen as unlikely, given the weak U.S. dollar and as none is already present in Europe — making RBS’s European platform far less appealing.
AIG, moreover, is already wrestling with $20 billion in unrealized losses over the last two quarters. But Warren Buffett’s Berkshire Hathaway, despite ruling itself out of the auction process, could come in with an eleventh-hour bid, one banker said.
Ping An is also seen as an unlikely buyer, according to sources, despite persistent speculation that it is looking abroad, after it delayed a new share issuance and constraints of Chinese rules on financial investment overseas.
UK rivals will struggle for competition reasons from buying a player that accounts for a third of UK motor policies.
Zurich is seen as the front-runner despite being scalded by its costly 1998 acquisition of Eagle Star.
It is already a growing player in the UK motor market and hired RBS Insurance’s former head, Annette Court, two years ago.
Having dragged the group back from a whopping loss in 2002, Zurich CEO Jim Schiro may look to do a big deal before retiring, kickstarting long-awaited growth after years spent slimming down and restructuring the group.
But a bid for RBS Insurance would represent a big gamble for Schiro, who has shown only a limited risk appetite so far, preferring bolt-on acquisitions to major deals, in deliberate contrast to his free-spending predecessor Rolf Hueppi.
Generali has long flirted with the idea of taking a foothold in the UK and has up to 5 billion euros ($7.9 billion) of firepower to spend on an acquisition. It has publicly acknowledged its interest in an asset that would complement the group’s geographical spread and boost its online sales platform.
Chairman Antoine Bernheim is keen to bulk up to a size similar to rivals Allianz and AXA, but Generali has signalled it would prefer niche deals in the United States and growth markets of Central and Eastern Europe.
RBS has excluded buyout firms in the first round, but sources said they could return at a later stage or come in to partner bidders, particularly if bankers struggle to generate much competitive heat in the auction.
(Additional reporting by Mathieu Robbins, Claudia Delillo, Simon Challis and George Chen; Editing by Andrew Callus)
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