Final sale figure deemed a "fantastic price" by analysts

Aviva’s £1bn sale of breakdown recovery firm RAC, as revealed by Insurance Times, has been a resounding success, according to equity analysts, because of the price, the prospects for reinvesting the proceeds and the focus the sale brings to the business. But the company is unlikely to use the proceeds to make general insurance acquisitions.

The £1bn in cash Aviva will receive from private equity buyer Carlyle Group – 17 times RAC’s 2010 earnings – was a pleasant surprise for analysts, as it far exceeded the general market expectations of between £600m and £700m. “Our view is that it is a fantastic price – much better than we were going for,” Panmure Gordon analyst Barrie Cornes said.

The financial impact of the sale on Aviva is also positive. “You’re talking about a 9% uplift in tangible book value for a loss of earnings of between 1% and 3%,” said Espirito Santo analyst Joy Ferneyhough, adding that the reduction in earnings may be smaller given that Aviva will maintain its distribution relationships with RAC. “There is still an earnings stream to come from the combination of RAC and Aviva,” she said.

Aviva may use some of the capital to pay down debt. Cornes says Aviva had previously said it wanted to pay down around £700m of its hybrid debt.

Aviva plans to grow its new corporate and specialty risks division, but Ferneyhough argued that it is unlikely to do so through acquisition. “Their point has always been that they have got the infrastructure in place and the expertise – they had just in the last few years chosen to withdraw from that market. The car’s in the garage, they just need to turn the ignition.”