Aviva/Cevian: tough targets license Blanc to push harder
Large, lethargic and underperforming, the UK insurer is tempting for the Swedish activist investor
Scandinavian visitors had a mixed reputation in Britain’s distant past. They might be raiders, traders or peaceful settlers. Amanda Blanc must countenance all three scenarios in dealing with Cevian, the powerful Stockholm-based investor that has taken a 5 per cent stake in Aviva.
The activist has engineered break-ups, takeovers and management shake-ups across Europe. It would be just as happy if gentler remedies doubled the value of its £800m cash equity stake in the UK insurer over three years.
Aviva is a tempting target. Large, lethargic and underperforming, it has been a graveyard for managerial ambitions for at least a decade. Newish chief executive Blanc has shown greater dynamism than predecessor Maurice Tulloch, agreeing £8bn in disposals. But the business remains the last big insurance conglomerate listed in London. RSA, another Cevian investment, has just completed its well-priced £7.2bn break-up sale to Canada’s Intact and Tryg of Denmark.
Cevian has not suggested that Aviva should hoist a For Sale sign over remaining assets. They include life and non-life insurance, lacklustre fund manager Aviva Investors and a big “closed book” of legacy cover.
The investor has set financial targets instead. The first two look tough, but achievable. The eye-catching biggie is a £5bn capital return. The starting point is Aviva’s capital. This is about 250 per cent of its regulatory minimum, 70 percentage points or £6.6bn above the insurer’s 180 per cent target, which incorporates a safety buffer.
Cevian is making lower subsequent deductions than some analysts. Panmure’s Ming Zhu, for example, reckons just under £4bn may be refundable to shareholders. As a second aim, the activist wants Blanc to lift her cost-saving target from £300m to £500m yearly out of operating expenses of some £3bn.
Blanc’s sharpest intake of breath must have been reserved for Cevian’s suggestion that she should more than double the dividend to 45p within three years. The activist optimistically hopes the share price would also double to over £8, a level not regularly seen since 2007.
To get anywhere close, Blanc would need to do two things. First, hit annual and half-yearly targets with the same consistency as Legal & General. Second, strip out layers of management while galvanising ordinary staff. External pressure from Cevian should make both tasks easier to justify and achieve.