Final valuation of up to £11 per share is at least 40% better than average price in first half of 2010
Shareholders in Lloyd’s insurer Brit have secured a good price for the firm despite depressed insurance company valuations and the current soft market, according to analysts.
On Tuesday, Brit agreed an offer with Achilles, a company established by prospective buyers Apollo and CVC Capital Partners, under which Achilles will pay Brit £10.75 a share.
Achilles will also pay up to 25p a share, known as the contingent value payment (CVP), based on the extent to which Brit’s year-end net tangible assets exceed £10.75 a share.
Panmure Gordon analyst Barrie Cornes said: “If the underwriting cycle stays flat or continues to soften, as we think it will, then in 12 months, when people look back, this will be a great deal for shareholders.
“They will be able to take this cash and invest it elsewhere in the sector if they feel the underwriting cycle will turn. Our view is that this is a fair price all round. There is risk being taken by Apollo and CVC, but at the same time shareholders are being reasonably rewarded.”
Brit said the £10.57-£11 a share offer is a premium of between 47% and 51% to the closing price of £7.29 on 10 June 2010 – the last business day before the offer period began – and a premium of between 40% and 44% to the average closing price of £7.66 for the six months ended 10 June.
“It’s a good deal for shareholders,” KBC Peel Hunt analyst Mark Williamson said. “It is a very significant premium to the value before the start of the deal talks.”
The decision to offer a sliding-scale contingent payment was a sweetener for Brit shareholders, according to Cornes, because it allows the final price to be a close match to net tangible assets.
He said: “I suspect shareholders would feel relieved that there is that flexibility, because many felt the company should not be sold at a discount to book value.”
“If the book value does go up to £11 a share, they will receive that amount, and if it doesn’t they will not be too dissatisfied with the amount they receive.”
While the deal looks almost certain to go ahead, there are still obstacles. The FSA has yet to approve the deal, and Achilles requires 95% of Brit’s shareholders to accept the offer, which Jefferies analyst Nicholas Pope described in a research note as at a high level. There is also some uncertainty around Brit’s ability to capture the CVP.
The total package offered by Achilles, assuming Brit earns the maximum £11-a-share CVP, values Brit’s issued and to-be-issued share capital at about £888m.