RSA/Aviva tie is logical but unlikely

A merger between UK insurance heavyweights RSA and Aviva would make sense, but there are several barriers preventing a deal, according to Barrie Cornes, an analyst at stockbroking firm Panmure Gordon.

RSA/Aviva merger talk was stirred up again by press reports this weekend, suggesting that Aviva had made a £7bn bid for RSA.

Last summer, Aviva rejected a £5bn offer from RSA for its general insurance business.

"Whilst we can see the logic for such a combination, as highlighted by RSA when it made its offer for most of Aviva’s non-life operation last summer, we think that RSA’s current share price will preclude any such acquisition," Cornes wrote in a research note responding to the fresh rumours.

Cornes added that while RSA is a well-managed business that is coping well with tough trading conditions, "a valuation towards £7bn or circa 208p a share seems highly speculative and rather unlikely in our view."

Panmure Gordon believes RSA's shares are undervalued and gives the stock a target price of 150p, valuing the business at around £5bn or twice the forecast net tangible asset value for 2011. RSA's stock price closed yesterday at 135.9p.

Nevertheless, Cornes noted the logic in the deal. In its failed bid last summer, RSA identified £300m of cost savings.

Cornes argues RSA's summer bid was scuppered by the internal funding or 'double-leverage' of Aviva's life and non-life businesses, but adds: "If the internal funding at Aviva made RSA’s offer a non-starter then logically a bid by Aviva for RSA would make sense."