Brit/Apollo and CVC deal could spur further takeovers and mergers

If private equity firm Apollo succeeds in buying Lloyd’s insurer Brit - which looks almost certain since it teamed up with CVC Capital Partners to table an improved offer - some analysts believe it could spark more interest in buying Lloyd’s vehicles.

In particular, a successful bid for Brit could indicate to other private equity firms that Lloyd’s is a place to look for a good deal. With a few exceptions, the stocks of Lloyd’s-listed players, in common with the rest of the insurance industry, are trading below net tangible assets (NTA) value, which could allow these firms to pick us assets at a discount.

“It is unlikely many people would have expected private equity to get into this sector a year ago,” Oriel Securities analyst Thomas Dorner says. “If this transaction goes ahead, which we think looks increasingly likely, we expect there to be more corporate finance departments across the City taking a closer look at this sector ”

KBC Peel Hunt analyst Mark Williamson agrees to a point. He says: “Valuations are very undemanding in the sector. There is a number of companies you could look at with a similar logic to that which Apollo and CVC have used with Brit,”

However, he adds: “You should never say never but consolidation in the insurance sector, and the Lloyd’s sector in particular, is often talked about but rarely happens.”

Barriers remain

The positive effects of the Brit deal on Lloyd’s M&A may be confined to private equity-backed punts. A successful bid by Apollo/CVC would do little to remove the barriers to mergers between Lloyd’s vehicles.

Williamson says: “Lloyd’s vehicles are fundamentally personality-driven. If the personalities don’t want to be acquired, the talent just walks out the door and the acquirer could be left with nothing but an expensive brand name.”

Fledgling Bermuda (re)insurers have also often been touted as potential acquirers of Lloyd’s businesses as such purchases would allow them to gain Lloyd’s global licences. However, it is increasingly difficult for a company to buy a Lloyd’s operation and turn it to its will. Williamson says: “If you buy a platform and go to Lloyd’s with a new business plan that fundamentally changes the character or scale of the business, you have to gain approval. There is no certainty that Lloyd’s will let you do what you want to do.”

Taking a look around

While a Brit deal may not generate a flurry of Lloyd’s mergers and acquisitions, analysts are cautiously positive. “At these pricing levels, people are going to be looking at different options,” Collins Stewart analyst Ben Cohen says. “I would be surprised if we were to see copycat deals, but people are going to be looking around.”

At the very least, the Brit deal, and the potential for greater interest in Lloyd’s companies from private equity firms, could boost some listed Lloyd’s stocks. Oriel’s Dorner believes that smaller firms, in particular Chaucer and Novae, will benefit. “The fair value for these businesses should now be about one times NTA, rather than current discounted valuations,” he says.