Deal Reporter
AXA, Allianz, AIG could be logical rival bidders - banker
Funding structure, risk assessment could put break-up bidder at disadvantage
Zurich Insurance [VTX:ZURN] could have an advantage over potential RSA [LON:RSA] bidders with weaker credit ratings with regard to their ability to value the target’s UK pension liabilities, a source familiar with RSA and a sector banker said.
RSA’s pension liabilities could act as a “poison pill” for some potential buyers, an independent pension adviser said. Valuation of the liabilities could be “very different” depending on the buyer’s covenant strength, a source familiar with RSA’s pension schemes said.
Target pension liabilities may get revalued at varying rates after a takeover depending on the buyer’s credit strength, the two sources familiar said. As of 1H15, RSA’s UK pension liabilities amounted to approximately GBP 7bn.
A bidder may want to approach pension trustees quickly in the event it makes a bid, in order to value the liabilities correctly from the start, the pension adviser said. It would be up to the trustees, target and buyer to agree on if and how they want to start talks, the source familiar with RSA’s pension schemes said.
Under Rule 25.9 of the UK Takeover Code, pension trustees have the right to comment on a bid. RSA’s SALPS and RIGPS pension schemes are closely monitoring Zurich’s potential move, trustees said. They have been in communication with RSA and are working with advisors to ensure appropriate actions are taken to protect the members’ interests.
RSA’s most recent triennial valuation showed its three main UK funds had an aggregate funding deficit of GBP 477m at 31 March 2012, equivalent to a funding level of 93%. The Group and trustees agreed plans in 2012 to eliminate the deficit by 2022.
In its 1H15 report, RSA estimated its UK pension schemes were 97% funded on 31 March 2015 and had a GBP 106m surplus at 30 June. According to the report, RSA earlier this year started its latest triennial valuation, as of 31 March 2015, and expects the outcome around the time of its full-year 2015 results.
A takeover revaluation would depend on factors including the amount of debt financing required for the acquisition, the source familiar with RSA’s pension schemes, the pension adviser and the banker said. The valuation may not increase under the new owner if it has a stronger credit rating than RSA, they added.
Insurers including Germany’s Allianz [ETR:ALV], France’s AXA [EPA:CS] and US-based AIG [NYSE:AIG] could be logical rival bidders, the banker and an insurance analyst suggested. The European companies would see synergy potential while AIG could want access to RSA’s markets where pricing is more favourable than in the US. All could have the necessary firepower to launch a bid, they said.
Zurich is rated AA- with a positive outlook by Standard & Poor’s (S&P) and Aa3 (stable) by Moody’s, according to its website. S&P has an A rating with stable outlook for RSA, while Moody’s A2 (negative) according to its web site.
Among strategic players mentioned as potential rival bidders, Allianz is rated AA (stable) by S&P and Aa3 (stable) by Moody’s; AXA is rated A+ (positive) by S&P and Aa3 (stable) by Moody’s; and AIG A- (stable) by S&P and Baa1 (stable) by Moody’s, according to the companies’ web sites.
Private equity-led break-up consortia have also been reported as potentially interested in RSA. Private equity firms including Apollo [NYSE:APO] have been rumoured in the past to consider bidding for RSA, the banker noted.
A break-up consortium backed by private equity would typically take on significant debt financing for a deal, the banker said. This would weaken the covenants it could offer to the pension trustees, so pension valuation could become a hurdle, he added.
UK insurance companies also hold certain business units liable for certain pension schemes, the pension adviser noted. Public disclosure tends to be limited on which units back which schemes, so it could be difficult for a break-up bidder to assess various units’ risk before due diligence, he argued.
RSA was formed through a series of mergers so has several schemes, the pension adviser noted. Their valuation depends on how relaxed or prudent a discount rate pension trustees pushed for, he said.
If RSA were broken up, pension trustees could enter negotiations with the owner, the source familiar with RSA’s pension schemes said. They could ask, but not force through, for some scheme holders to be bought out with upfront payments. Otherwise the schemes could remain on the broken-out units’ balance sheets getting valued at steeper rates due to weakened covenants, he added.
Zurich Insurance said on 28 July it is evaluating a potential offer for RSA, which has a market cap of GBP 5.14bn as of today (11 August). The offer will be all-cash, it later confirmed.
RSA, AXA, Allianz and AIG declined to comment. A spokesperson for Apollo declined to comment.