Investors lock horns in battle for Chaucer

Goldman Sachs is going head-to-head with private equity tycoon Guy Hands in the battle to take over Chaucer, despite the Lloyd’s insurer posting a 20% drop in profits.

A consortium comprising investment bank Goldman Sachs and US private equity house TPG is thought to be eyeing up a 60p-per-share bid.

Hands, who lost control of record label EMI earlier this year, has admitted Terra Firma’s interest in Chaucer, although the private equity house has not yet made a formal bid.

The takeover battle moved up a gear as Chaucer posted a profit after tax of £22.5m for the full year of 2010, down on the £28.1m it made in 2009.

Chaucer has been hit by a series of natural and man-made catastrophes around the world, including the Chilean earthquake, the Deepwater Horizon oil rig explosion in the Gulf of Mexico, and floods in Australia.

Espirito Santo analyst Joy Ferneyhough said the catastrophe losses could put pressure on Chaucer to perform strongly in other areas of its book this year, such as energy and UK private motor.

She said: “The fact that Chaucer suffered around $40m of losses in the fourth quarter of 2010 from New Zealand and Australia suggests that further losses – and possibly greater losses – may be felt in the first quarter of 2011 from earthquake and flood losses in the region.

“As such, pressure then increases on the energy and UK businesses to improve underlying earnings. Otherwise this tangible book value growth will again be low in 2011.”

Chaucer was trading at 58p at press time, not far off Ferneyhough’s recommended bid price. She said: “Given that we believe underlying return on equity to be in the 12%-12.5% range, the low 60s looks to be fair value for now.

“The recently rumoured bidders are private equity, so we find it difficult to argue for a price much higher than this due to lack of synergies.”

Shore Capital analyst Eamonn Flanagan put Chaucer’s net tangible asset value at 54p for 2011 and set a slightly higher bid price.

He said: “In our view, given the undoubted attractions of Chaucer to a trade buyer or private equity firm – the diversification of its underwriting exposures, its asset gearing, its presence in Lloyd’s – we believe a 20% premium to this 2011 forecast net tangible asset value is justified. This would imply a take-out price of at least 65p.”