Private equity firm could come back with improved offer

Brit is likely to face an improved offer this week from US private equity firm Apollo Global Management. And some believe Brit shareholders will accept less than the £11 a share that management are reportedly seeking.

Brit rejected a £10-a-share offer from Apollo two weeks ago, saying that it significantly undervalued the group.

But KBC Peel Hunt analyst Christian Stobbs said: “Apollo are clever people with a lot of firepower. They have obviously decided Brit is the one they are going to get and I’m sure they are going to get it. It all comes down to price."

Another source said he would be “amazed” if the private equity firm did not come back with an improved offer.

The source suggested that Andrew Galloway, co-founder and managing director of West Hill Corporate Finance – one of the advisers to Apollo – has long been keen to tie up a deal with Brit, adding impetus to the transaction.

And Apollo is thought to be interested in adding a Lloyd’s insurer to its portfolio of investments.

Brit’s current book value (assets minus liabilities and intangible assets) is around £11 a share, prompting analysts to warn that its board will not accept less.

However, Stobbs argued that shareholders would accept less.

“£10 was a good starting point and the board, probably rightly, said no. But if the offer is in the range of £10.50, £10.75 or £11, shareholders will probably bite,” he said.

Stobbs said the insurance sector as a whole was trading at below book value. He predicted that without a revaluation of the sector it could be two to three years before Brit was trading at £11 a share.

He added: “People are going to talk about how management won’t accept less than £11, but in reality they may well.”

A further issue is that the deal itself could reduce net tangible assets per share. Some reports have suggested that an employee rewards scheme could result in up to four million new shares being issued if the acquisition goes through.

Last week, Panmure Gordon analyst Barrie Cornes told Insurance Times that a successful deal could dilute Brit’s net tangible assets to £10.30 a share from his current estimate of £10.80 for the 2010 year-end.

A spokesman for Apollo said the firm was not commenting on the Brit transaction at this stage.

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