Let the bidding begin

AG’s decision to sell off parts of its UK portfolio has led to plenty of speculation about the potential suitors for the troubled business.

The global insurance giant announced in July that it was looking to sell private motor broker Hastings, Gibraltar-based motor insurer Advantage and Equity Insurance Brokers.

It is looking to hold on to Lloyd’s motor giant Equity Red Star, Equity Direct and recently acquired commercial broker Barnett & Barnett.

IAG entered the UK market two years ago when it acquired Hastings and Advantage, followed a few months later by the purchase of Equity Group, and has been battling to make parts of the business profitable.

With IAG UK chief Neil Utley expected to begin presenting a sales prospectus this month, there are a number of potential scenarios on the table.

A number of trade buyers are understood to have expressed an interest in the UK business. A management buy-out is also a possibility.

There is plenty to excite players considering taking on all or part of the UK business up for sale, according to one industry source. “IAG UK has high street presence, a base in Gibraltar and a consumer brand in Hastings which is also attractive.”

The sale price for Hastings and Advantage may prove attractive with it unlikely to match the £140m price tag paid by IAG in September 2006. “For what it’s been through, they will probably still try to get between £80-90m,” the source adds.

Hastings and Advatage have been a major drag on IAG’s UK profitability and the focus of the UK management’s attention.

So there is scope for a deal to be done. But investors may be wary given the company’s recent history.

Most recently, Hastings was on the receiving end of a £735,000 FSA fine in July after failing to cancel 4,550 incorrectly priced car insurance policies which may put prospective suitors off.

It is unlikely that a single company would look to buy all of the businesses that are for sale, according to one senior insurance consultant.

With the UK division comprising broking business and an insurance company, it is difficult to see a trade player wanting both parts of the business, the consultant says.

So which companies could be involved?

The consultant suggests: “Equity Insurance Brokers would appeal to Swinton and Advantage will appeal to Budget.”

Insurance Times reported in July that Swinton chief executive, Patrick Smith, had been in discussions with Equity Insurance Brokers.

Equity Insurance Brokers has a presence in 94 UK branches and controls over £200m GWP and would facilitate Swinton’s drive to expand its branch network from 480 to a desired 1,000 branches.

This week Smith told Insurance Times that he was not currently in discussion with IAG.

Zurich, which recently withdrew from the race to buy Royal Bank of Scotland’s insurance arm, is another big hitter with the financial muscle that could make a play for IAG.

Its interest in RBSI shows that it is interested in acquisitions in the UK.

Zurich could be interested in Hastings and EIB, although one source suggested that a move on the latter was less likely given that the insurer has cut its branch presence through Endsleigh recently.

Broker Endsleigh, which is owned by Zurich, recently announced the closure of its 119 branches by the end of the year.

Another option could involve a private equity-backed deal. A source says: “Hastings and Advantage are known to have issues therefore there is not much in it for a trade bidder. I fully expect people with private equity to be interested and for people to be after the distribution side of the business.”

So a management buy-out using private equity money is a possibility, with IAG boss Utley previously hinting he may lead such a venture for parts of the business.

Utley led a £430m buy-out of Cox, which later became Equity, in 2005.

One industry source says that an MBO is the most likely outcome from IAG’s UK fall-out. “I would put money on an MBO led by Edward Fitzmaurice, Nick Potts and Mike Hutton for Equity Broking,” he says.

The source adds that Fitzmaurice and Utley have been integral players in the turnaround at Hastings. “Hastings has been hit by a fine but the work done by Neil Utley has been exceptional to integrate the business and turn it around. Ed Fitzmaurice has also been a key player in the turnaround.”

Could Australian insurance giant QBE, which made an audacious bid for the whole of IAG in May this year, be tempted to make an offer?

QBE made a bid valuing IAG at A$8.7bn, which was swiftly rebuffed with IAG’s then chief executive Michael Hawker claiming it merely reflected a short-term weakness in its share price.

Experts think a move by QBE on the UK business alone is unlikely. The consultant says: “I don’t expect QBE to be interested for this part, possibly if Equity Red Star was for sale, but not for now.”