Hands may grab a bargain as Chaucer bidding war hots up

Private equity tycoon Guy Hands may have to pay only a small premium above Chaucer’s current share price to buy the Lloyd’s insurer, according to equity analysts.

The chief executive of Terra Firma announced this week his intentions to buy Chaucer, whose share price has rocketed amid frenzied speculation of a takeover.

Espirito Santo analyst Joy Ferneyhough estimated that Chaucer’s year-end 2011 net tangible assets will work out at 55p per share, putting a price per share of around 62p-63p at around 1.1 times book value.

“The return on equity for the group over the next couple of years is probably going to be around 11%-12%, so that feels about a fair level now,” she said. “I wouldn’t have expected any private equity bid to be that much in excess of that.”

Shore Capital analyst Eamonn Flanagan had a more bullish outlook, stating in a client note that a price of between 1.25 and 1.3 times net tangible asset value would be “highly justified” for Chaucer, suggesting a price of between 72.5p and 75p.

In response to share price moves on Monday this week, Chaucer revealed that it had received a number of approaches regarding a possible offer. The insurer’s share price closed at 61.50p on Monday, up 17% on Friday’s closing price of 51.75p.

Guy Hands is keen on Chaucer despite having record label EMI taken off him by the banks last month. A consortium of Goldman Sachs Private Equity and TPG Capital was also named last year in connection with the Lloyd’s insurer, but never followed up with a formal offer.

The eventual price could depend heavily on Chaucer’s shareholders’ view of the company’s fair value. Private equity firm Pamplona is the insurer’s biggest single shareholder with a 9.9% stake. Given that Chaucer’s shares are now trading higher than their previous levels, Pamplona might be tempted to offload its stake, Ferneyhough suggested.

The Royal Bank of Scotland analyst Joanna Parsons noted that Hardy rejected Beazley’s offer of 1.3 times book value, but added: “I suspect Chaucer shareholders might be more interested at 1.3 times book.”

Much could also depend on whether the eventual buyer is a private equity firm or another insurer. Ferneyhough pointed out that a trade buyer would be able to achieve cost savings that a private equity buyer would not.

Parsons said a lot could depend on whether the offer was in shares or cash. “If it is Terra Firma making a bid, it is going to be cash,” she said. “That will be appealing, and they may be prepared to take a slightly lower multiple because it is cash and it is an immediate exit.”