Could Pamplona derail Hanover’s Chaucer bid?

US insurer Hanover’s bid for Chaucer looks to be a done deal. The £313m offer, 1.09 times the Lloyd’s player’s 2010 net tangible assets, was been recommended by its board and 23.59% of shareholders have already committed to voting in favour of it.

The list of those that have submitted these irrevocable undertakings to support the bid includes some of Chaucer’s biggest shareholders, such as BlackRock, Aberforth Partners and Henderson.

As Chaucer chief executive Bob Stuchbery told Insurance Times: “That gives a strong signal that it is a deal likely to get done.”

Largest stakeholder

Crucially, however, Russian private equity firm Pamplona, which is Chaucer’s largest shareholder with a 9.9% direct equity stake, plus a further 6% indirect stake via other instruments, has yet to show its hand.

Furthermore, Hanover's offer is neither a significant premium to Chaucer’s current share price nor its net tangible assets per share. Hanover’s all-cash offer comprises a main amount of 53.3p a share, plus a final dividend of 2.7p a share. Chaucer’s share price closed at 54p on Tuesday, the day before the deal was announced. On the day of the announcement it was trading at around 55p.

The relatively cheap price could leave the door open for a higher bidder to woo Pamplona and the rest of the shareholders that have not yet committed to the deal. “It is on a knife-edge as to whether something else comes along because the price is certainly not a knockout price,” Panmure Gordon analyst Barrie Cornes said.

Tough to beat

Despite this, Hanover’s offer could be tough to beat. The all-cash offer will be tempting to shareholders, and others could struggle to pay more. “I don’t see how any private equity backed firm could come in and bid more,” Espirito Santo analyst Joy Ferneyhough said. “I also don’t get the impression that any trade buyer out there is willing to come in and pay silly money because I do think 55-56p is about right, particularly given that we are running into US wind season and there is still risk that that book value could deteriorate further from the current position.”

A number of bidders are thought to have been circling Chaucer in recent months. These include Guy Hands’ private equity firm Terra Firma, fellow Lloyd’s insurer Canopius, a consortium comprising Goldman Sachs and US private equity house TPG, and ascot Underwriting founder Martin Reith.

New bidder unlikely

Some feel it is unlikely that any of the existing group of suitors will try to trump Hanover’s offer. “The group that’s in there at the moment have had plenty of opportunities to move forcefully in terms of grabbing the target,” says Shore Capital analyst Eamonn Flanagan. “The fact that they haven’t suggests to me that it is unlikely [the advisers] will flush out a higher bid from within that group of companies.”

A new bidder is equally unlikely, argues Flanagan. A trade buyer may have to offer shares in addition to cash to top Hanover’s offer. To provide an attractive enough stock offer, the potential suitor’s share price would have to be trading at a premium to its net tangible assets, and these are few and far between in the insurance industry. “There is a very limited gene pool there, and I don’t think those who do exist are interested,” says Flanagan.

Logistical issues

A new private equity buyer entering at this stage would need top conduct due diligence and then raise the necessary funds to buy the company, delaying the process, which is likely to be unattractive to shareholders already weary of Chaucer’s lengthy, stop-start takeover saga. “There are logistical issues behind a counterbid which make it unlikely to happen,” says Flanagan.

Equally, there are signs that shareholders are growing weary, which could mean they will prefer to take Hanover’s money and run. “There have been some shareholders who haven’t been particularly happy over the last year or two being in Chaucer,” says Cornes.

With the majority of shareholders’ votes still to be accounted for, there is still uncertainty. But following the numerous takeover attempts for Chaucer over the years, beginning with Amlin’s in 2004, there is a sense that Hanover’s is the one. “This time, I think it’s bye bye Chaucer,” Flanagan says.