Brit rated ‘underperform’ on Apollo deal doubts

Jefferies Research insurance analysts Nick Pope and James Shuck have initiated coverage on Brit with an ‘underperform’ rating, partly because of doubts that private equity firm Apollo Global Management will acquire the company.

The analysts said in a research note that Brit’s shares are currently trading around £9, implying a 50% chance of deal completion. Jefferies’ price target for Brit is £8.04 on the basis that a deal failure could return the stock to pre-bid levels.

Brit rejected an improved £10.50-a-share offer from Apollo on July 2 as the board deemed it to undervalue the company. Brit’s board is thought to be seeking £11 a share for the firm. Despite expectations that it would, Apollo has not yet returned with a better offer.

Pope and Shuck pointed out that private equity investors have historically targeted smaller deals and syndicate start-ups. They added that Apollo may have a more conservative view of liability reserving than Brit itself, leading to a lower estimation of book value and thus a lower offer. “We therefore view the balance of risks of deal consummation at book value to the downside, even if Apollo raises its bid, and the likely outcome being shares retreat towards pre-bid levels,” the analysts wrote.

The Jefferies analysts are downbeat about the prospects of consolidation among listed Lloyd’s insurers in general, stating that “M&A can wait”.

“While consolidation is necessary among the Lloyd’s stocks, it is notoriously difficult to pull off and private equity has a poor track record,” they wrote.

In addition to Brit, Jefferies has initiated coverage of Amlin (buy), Catlin (hold), Hiscox (hold) and Lancashire (buy).