Why are shares in RSA Insurance (LSE: RSA) (NASDAQOTH: RSANY.US) up 9% from last week’s close? Not on any hard news, for sure. But the market is anticipating the possibility of some exciting M&A together with some positive newsflow. If the former comes to fruition, shareholders might see a quick 30% profit on the current price of 100p or so.
129p
On Monday brokers UBS suggested the company would be worth at least 129p per share if broken up. And it spelled out how that could be achieved. It thinks Finnish insurance group Sampo “could oversee a takeover with a view to disposing of the operations it doesn’t want”. UBS thinks Sampo would hold on to RSA’s strong Scandinavian operations, and those in the Baltics next door.
It makes sense to me. RSA has some excellent businesses (if the profit figures can be believed), with leading market positions in the UK, Canada and Scandinavia, and a growing emerging markets presence. Ironically, these were acquired and grown while recently departed CEO Simon Lee was running RSA’s international division.
They are good business, but disparate. Each is likely worth more to a local or regional insurance group. In the UK, the motor insurance market is overcrowded and several insurers could be interested in taking out a competitor. In any case there’s currently an ‘RSA discount’, with so much uncertainty surrounding its capital position, future leadership and investor confidence.
Irish troubles
RSA’s shares have also been buoyed this week by speculation that, when it updates the market tomorrow on the accounting problems at its Irish subsidiary, the situation will not look as bad as first feared. UBS thinks the insurer could get away with missing its full-year dividend and raising just £500m new capital — that’s probably mostly in the price now. The broker doesn’t think big disposals will be necessary.
There is a big if in this. What RSA says tomorrow could change everything. And if there’s a whiff that the root cause of its problems is more widespread than just in Ireland, all bets are off.
I’ll certainly wait and see what the news is on Thursday. It can often be a very long time between the market anticipating a takeover bid and an approach emerging, and most times the story simply fades away. But if RSA’s Irish problem is manageable then the potential downside to its shares is relatively limited.
