RSA's geographical footprint would be complementary to Aviva's, claims Berenberg analyst.
Aviva could make a bid for RSA, analysts have predicted.
According to Matthew Preston, analyst at Berenberg, “while an acquisition of RSA would represent a significant change of tack for Aviva’s management, it is not without theoretical merit”.
Preston added that there was “plenty of strategic merit” to the idea too, on the basis of market leadership, cash and earnings.
He acknowledged that there were various disadvantages to such a deal, including the fact that Aviva is currently in the process of rationalising and restructuring its “sprawling operations”, which involves the unwinding of some of the company’s "previous ill-fated acquisition activities".
Added complication
“In our view, management already has a very long to-do list without the added complication of a class one transaction,” stated Preston.
He continued: “In addition, we believe that some investors would likely baulk at the suggestion of an RSA acquisition – a scepticism undoubtedly heightened by the current issues RSA is facing and Aviva’s own acquisition history.”
However, Preston pointed out that RSA’s geographical footprint is a good match with Aviva’s and claimed that overlapping operation in the UK, Europe and Canada offered the potential for “significant in-market synergies”. Indeed, in 2010, RSA made a £5bn bid for Aviva's GI business.
According to Preston, the Emerging Markets business at RSA would also add to Aviva’s growth potential.
Opportunities
“The combined operations would have market-leading positions in the UK, Canada, Ireland and Scandinavia, and would also offer some interesting additional non-life growth opportunities,” he said.
“In terms of the group as a whole, the overall profile would be reshaped to be more non-life heavy, potentially improving the cash flow profile.”
Based on analysis carried out by Berenberg, Preston estimated that Aviva could comfortably pay 120p for each RSA share while still delivering earnings accretion of 1.2%.
And Preston added that purchasing RSA could prove to be a shot in the arm of Aviva’s current “cash flow plus growth” strategy.
Remedy
He highlighted two key issues that Aviva faces with this strategy: “While we expect cash flows to improve (and, more specifically, cash remittances to get better), we expect any improvement to be diverted in the near term towards reducing internal and external leverage, leaving little room for an uplift to shareholder distributions.
“At the same time, with c.90% of the business operating in mature markets and management committed to value over volume, we struggle to identify where sizeable future growth will come from.”
Preston conluded: “In our view, an acquisition of RSA could offer a way of partially remedying the first of these issues, while also injecting a little more growth into the Aviva footprint.”
Other companies named in recent months as potential buyers of RSA include Nordic insurer Sampo, Generali, Allianz and Zurich.
