Stephen Hester, the sometimes testy gardener-banker-insurance boss, is as happy as one of the Newfoundland dogs pictured in his office. Newfies are never more fulfilled than when pulling in fishing nets. Mr Hester has netted a bid for RSA Insurance from Canadian and Danish rivals Intact and Tryg at a rocking price. The overseas duo are offering 685p a share or £7.2bn — a 50 per cent premium to RSA’s pre-bid price.
RSA’s shares haven’t been as high since 2018. The last offer — from rival Zurich at 550p a share in 2015 — didn’t come close. Mr Hester, who was recruited in 2013 to turn the ailing RSA round and (it was assumed) flog it, said Zurich’s offer was too early and too low. Fairly, it turns out. RSA’s returns on equity have risen from well below 13 per cent two years ago to near the top of the range at 17 per cent. RSA’s so-called combined ratio — costs and expenses against premiums — has inched down to 90 per cent in the year to date. That compares with a sector average creeping up towards 100 per cent.
Still, Mr Hester has cut it fine. The offer from Tryg and Intact was nearly too late.
The outlook for the insurance industry in the UK — maturing and fearsomely competitive — was already grey and share prices were weakening. Covid has only made it worse. Regulatory scrutiny is increasing. RSA itself is part of a High Court tussle over business interruption claims. Recession and low interest rates will compress investment income used to bolster earnings and dividends.
There’s long been chatter about insurers consolidating to offset thinning margins. Some chatterers will hope another interloper from overseas, where the sector is more highly rated, will be prepared to pay more. Most don’t though, which is probably why RSA’s shares are trading at 672p. Few rivals have the wherewithal to pay £7bn for a business so focused in Canada, Scandinavia and the UK. As Mr Hester says, neither Tryg nor Intact could have done it on their own. Aviva has been tipped as a possible suitor for RSA but its new top brass is wisely in disposal mode. It is more likely that Aviva will be broken up than do the breaking.
Of course, the Intact-Tryg deal contains considerable execution risk. It has satisfied RSA pension trustees, but the break-up is astonishingly complex and will not complete until well into next year.
Nonetheless, Cevian Capital, the activist and RSA’s biggest shareholder, has already said yes. Other investors should also plump for the certainty of cash in an uncertain world. It’ll make them as jaunty as a Newfie, too.
Croda’s move into scents lacks sensibility
For 95 years, the only fragrances made by Croda were incidental to its main trade of extracting sheep grease. No longer. The Yorkshire chemicals group is buying Iberchem, a scent maker founded among the orange groves of Murcia, Spain.
Steve Foots, Croda's chief executive, set out a grand plan to turn Croda into an ingredients one-stop-shop for the small manufacturers that make up three quarters of its customer base. The move into fragrances has been four years in the making, he says, though he had never previously mentioned it. A price of €820m means the current owner, private equity fund Eurazeo, will double its money having bought a 70 per cent stake in the business for €270m in 2017.
The market had been expecting acquisitions from Croda, but not this one. Recent excitement had centred around life sciences rather than personal care following a contract win to supply ingredients for Pfizer's Covid vaccine candidate. Longer term speculation tended to involve Ashland Global, Croda's closest match in the US, where any combination would allow for deep cost cutting.
Iberchem promises growth, not synergies. The company achieves double-digit sales growth by delivering 4,000 new products annually and has a quarter of its 850 staff working in research and development. A perpetual need for novelty makes fragrances only averagely profitable, and since Iberchem will be left to run independently there is little scope for improvement.
Croda wants to earn back the deal's cost of capital within five years, estimating €48m of revenue synergies or nearly 25 per cent of Iberchem’s 2020 sales. Getting there depends on cross selling, which won’t be easy. Croda’s sales force specialises in advising customers on which type of gloop they need, but scent buyers usually know exactly what they want.
Mr Foots says he won’t compete with the leading fragrance makers, but they want to compete with him. Givaudan and Symrise, Europe’s sector leaders, have been moving on to Croda’s turf. Competition will make life even tougher for a company that, according to JPMorgan analysts, has been growing earnings organically at just 2 per cent since 2014. While the addition of a fast growing business will help prop up sales, the strategic arguments don’t yet pass the smell test.
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