Aviva's one billion pound question

While analysts have been full of praise for the good price Aviva got for its sale of roadside assistance firm RAC, the market greeted the news with a collective shrug.

Aviva’s share price closed on 23 June, the day of the announcement, at 425.8p, 0.8% down on the previous day. On the day after the deal, the price suffered another slight drop, to close at 422.6p.

The general indifference could be because the company has not been terribly specific about what it wants to do with the £1bn it will get from the buyer, Carlyle Group. It simply stated that it would hold the proceeds as cash on the balance sheet, which it contended would “enhance liquidity and further strengthen Aviva’s balance sheet, enabling Aviva to continue to invest in its priority markets”.

The insurer is also still sitting on the £381m it netted in April from the sale of a 15% stake in European financial services group Delta Lloyd.

Burning a hole …

There is no shortage of uses that Aviva could put the cash it is amassing from its various disposals that could grab the market’s attention.

One is paying down debt. The company indicated in a January presentation to analysts and investors that it wanted to cut its hybrid debt by at least £700m over the next three years. The money could well be used in part to fulfil this aim.

However, a bigger issue for some is the much larger portion of intra-group debt. “That would be very good to get rid of,” Shore Capital analyst Eamonn Flanagan says. “The intra-group debt does appear to be a poison pill and an obstacle from the group’s point of view to eking out value for shareholders.”

“What we would hope they would want to do is get rid of both the hybrid and intra-company debt,” Flanagan says. “We would see that as a major positive.”

Boundless potential

Aviva is now focusing its efforts on 12 core countries, and has a stated aim of increasing focus and depth in these markets, as well as “excelling in both life and general insurance”.

“While at the moment that cash sits on the balance sheet waiting to be reinvested, we know that, at some point, this along with the Delta Lloyd money will be reallocated to businesses that are earning better returns on equity,” Espirito Santo analyst Joy Ferneyhough says.

There are growing opportunities on both the non-life and life sides where Aviva could deploy its new riches. “We are in a period where personal lines business is looking more attractive, and life growth may be starting to come back, so there are going to be plenty of areas that will require more capital as the market grows, and as Aviva grows within those markets,” Ferneyhough says.

Buy or grow

The company could, of course, be amassing a war chest for acquisitions. Some observers like the idea of Aviva turning the tables and bidding for RSA on the non-life side, or taking out a life player such as Standard Life.

However, there is a strong feeling that Aviva will use the RAC cash to grow in its 12 core markets organically, rather than chasing transformational acquisitions.

“I don’t think they are in a position where they have sold a couple of businesses and now they are going to buy something else,” Ferneyhough says. “It is a case of reallocating that capital into areas that are going to see natural growth and organic growth in the next couple of years.”