Zurich-RBS deal doubt

A leading analyst has raised doubts over the suitability of a sale of RBS’s insurance arm to Zurich, the frontrunner in the auction.

In a note to investors, Citigroup said the deal would only make sense for Zurich if the price tag was below £5.8bn – £1.2bn under RBS’s £7bn target.

This week, RBS chief sir Fred Goodwin insisted that the bank would achieve full value for RBSI. He said: “We had a price in our minds that we were looking for at the start of the process and that hasn't changed.”

Also this week, Zurich chief James Schiro insisted that the insurer would be the best firm for the business.

He said: “We probably have the greatest synergies for an asset like [RBSI]. To extract value in that business, we’re the only direct player who can do it.”

But he also warned that Zurich would not overpay for RBSI. Shares in Zurich have fallen by almost a tenth since RBS announced the potential sale of RBSI on 22 April.

Citigroup also said that there would be difficulties in integrating Direct Line’s and Zurich’s IT platforms, while the low rates of return on equity at NIG and UK Insurance (4.7% and 10.9%) would impact on Zurich target of 16% until 2010.

It suggested that organic growth might be a better option for Zurich, adding: The company has the cash and capabilities to further develop Zurich Connect, and the group has the management talent to do this well.”

Other bidders for RBSI are thought to have included Allstate and Allianz. But likely suitors such as AIG declined to bid, prompting speculation that the price had been set too high.

Citigroup added that Allianz, which is understood to have approached RBS in the autumn over a potential purchase of RBSI, would represent a better fit for the business, but had its hands full addressing strategic options for its subsidiary, Dresdner bank.

RBS confirmed last week it had concluded the £3.6bn sale of the UK’s biggest train leasing company, Angel Trains. It is also set to raise £1bn through the sale of its joint venture to Tesco.