Berenberg upgrades Esure, says Bain deal is 'excellent outcome' for shareholders

Berenberg upgraded Esure to 'hold' from 'sell' and lifted the price target to 280p from 230p after the insurer agreed to be bought by Bain Capital for 280p a share in cash.

The bank said that given the significant premium offered and the lack of obvious potential counter bidders, the offer is an "excellent outcome" for shareholders. It also said that with the backing of chairman Peter Wood and Toscafund, who between them own 47.7% of the shares, shareholder approval should be an easy hurdle to clear, while regulatory approval is not expected to be an issue.

"We believe Esure’s aggressive growth strategy will lead to worsening underwriting margins and significant capital strain. Indeed, this was demonstrated at its H1 results. With such strategic risks, exiting at a reasonable price is a good outcome, especially given the collapse in the shares over the past 12 months."

The bank does not reckon Esure will become the subject of a bidding war. "It has been widely rumoured that the company was up for sale for at least two years, with no bidders forthcoming. It is difficult to understand the strategic rationale for the acquisition, other than the favourable valuation.

"UK motor insurance is highly competitive, has a volatile pricing cycle and lacks growth. Hence, we do not think there will be significant demand for this asset from elsewhere."

Berenberg, which expects the deal to get regulatory approval before year-end 2018, said there is a risk that Bain could find something it does not like during further due diligence, such as a reserving shortfall. However, it noted that the private equity firm has already conducted a period of due diligence and was confident enough in the financials to submit a proposal to acquire the company.

At 1055 BST, the shares were flat at 277.60p.