Erinaceous: to sell or not to sell?

A year’s rampant speculation tends to take its toll, but in the case of Erinaceous, the AIM-listed company’s share price has done all the talking.

The challenge for the company’s insurance division, Erinaceous Insurance Services (EIS) – as of Monday officially on the trading block – is to avoid being dragged down with the rest of the business.

Its case is not helped by falling profits and staff departures as regular as they have been high profile; a point emphatically illustrated this week when business development director, Simon Millar, fled for a prime position at rival Lockton.

Yet for all the reputational and financial damage the wider group has suffered, the insurance business remains in surprisingly good shape. Cynics argue that is because the impact of the departures has yet to be felt. Though there can be little doubt that loss of people means loss of vital relationships, and potentially clients, it can be said with almost equal certainty that with its high margin, Erinaceous’ £30m book of commercial property business is a highly sought after prize.

The group openly admits it has struggled to integrate a string of acquisitions, as reflected by its excessive restructuring costs, but the insurance division was in the habit of buying good businesses, most recently Lumley Holdings in march, long before the trouble started.

Similarly, though the company’s half-year profits may have fallen by 40% to less than £5m, it has spent over £4m on restructuring, including the installation of new IT systems. The fact that 2006 was a relatively strong year for the company also lightens the fall.

Consequently, that the interims show only a modest decline in organic revenues of 3% is, arguably, a relative triumph.

On the other hand, the performance during the second part of the year will be far more telling, and is, as yet, anyone’s guess. Unsurprisingly, everyone seems willing to throw in their two cents. What is clear is that the company’s business will have come under sustained attack in the latter part of 2007.

And while the insurance division remains part of the parent group, it will inevitably find itself in the firing line. Until, and if it actually happens, it will be hard for champions of the business to separate the perceived jewel from the otherwise rusty crown.

All that being said, the insurance division could still fetch quite a hefty sum. While the breadth of estimates in terms of price is almost as dramatic as the fall in the groups’ share price, it is worth bearing in mind that there are few big brokers left that are realistically up for grabs. Erinaceous, in fact, has become an awfully big fish in a small pond.

Private equity and HBOS (who were officially interested in the group for a period of six months ending in August) may have backed away from devouring the whole pie, yet it is entirely possible that they will be licking their lips at the portion that is EIS.

And whatever the doubters may say, Monday’s confirmation that recent approaches for the division include private equity, as well as insurers and brokers, should be evidence that there is ample value in it.

Based on market opinion, the question is not when, nor if, but how much?