RSA denies bid talks after Zurich Insurance says it's mulling takeover

Earlier, Zurich said the announcement does not amount to a firm intention to make an offer and there can be no assurance any offer will be made.

But in an afternoon statement, the FTSE 100 company said: "RSA has not held talks with or received a proposal from Zurich and shareholders are advised to take no action."

Zurich bid or not, RBC Capital Markets said RSA is an attractive bid target. Although RSA has encountered a number of problems in its business in the last two years, it continues to have an attractive geographic split of business, said the Canadian bank.

“RSA has strong market positions in Scandinavia, in Canada, a large UK commercial franchise and operations in Latin America. Of particular interest to bidders would be the Scandinavian business in our view. Scandinavian insurance markets have oligopolistic characteristics, with few market players and strong profitability with low levels of competitions,” the bank added.

As far as premiums are concerned, RBC said the management team at RSA are likely to be more willing to accept a lower bid premium than the recent ACE-Chubb deal that yielded a 30% premium for the company.

“We also believe that investors in RSA will be more willing to accept a lower bid premium to the current share price due to a more protracted turnaround at RSA than the market expected in our view.”

RBC anticipates that a 10-20% premium would be sufficient to secure RSA. This implies a 480-525p offer range.

Meanwhile, Olivetree Securities said the general attraction of RSA is the stable and cheap valuation of the assets.

It noted that RSA currently has assets of £14.5bn supported by a market capitalisationof £4.4bn, “markedly cheap thanks to the performance issues which have dogged the company over the last few years”.

“The general thinking around a takeout story is usually to acquire RSA and take the assets (i.e pay a low price for them) and reinvest them in a much better way than RSA has done itself. This leaves it potentially attractive to a financial buyer such as Berkshire Hathaway (with which it has a lot of commonality in business agreements and even personnel) but also to large cap peers just looking to bolt on cheap assets,” said Olivetree.

It noted that at last set of numbers, management dampened speculation of a full break-up of the company by highlighting the size of the pension liabilities, culminating in a £3.1bn buyout cost. “This leaves a sale to a larger peer, such as Zurich, as the only reasonable path for RSA to crystallize value through M&A.”

With a potential bid now on the cards, Canaccord Genuity raised its rating on RSA to ‘buy’ from ‘sell’ and lifted the target price to 500p from 385p, which is a 10% discount to the offer price that’s been talked about.

“We think 550p would be a fair offer for RSA, but think there must still be a material risk that no offer is forthcoming, or that part of the offer is in Zurich shares, which come under some pressure,” it said.

Canaccord said that with RSA progressing slowly through its recovery, and weighed by a large pension liability, its shareholders are likely to want an offer at a material premium, given the value on a sum of the parts basis.

“While we expect Zurich shareholders to be cautious in their response, reflecting management’s lack of track record in a deal of this scale, and the material long tail and pension liabilities that would be brought onto Zurich's balance sheet, there would likely be material synergies, and a purchase would give Zurich a leading position in the UK, add materially to Latin American scale, and give entry to two attractive markets, Canada and the UK.”

Shares in RSA pared gains immediately after the announcement from the company, but by 13:09, they were sharply higher again, up 13.3% at 495.90p, having surged at the open.