Analyst views potential cash offer as ‘disappointing’

Brit ended months of speculation on Friday by announcing that it is in talks with rival Chaucer over a possible takeover through an all-share offer. Chaucer meanwhile sent out a short response acknowledging the offer.

Analysts regarded the potential cash offer as “disappointing”. “It might be in the 40-45p range which may be disappointing,” said Barrie Cornes, equity analyst at Panmure Gordon & Co.

Joy Ferneyhough, analyst at Execution, believes that an all-share offer from Brit would be difficult to make financially attractive for its own shareholders. “Particularly if a premium to Chaucer’s current share price is required (as has been rumoured in recent press speculation). Currently Brit trades at 0.8x reported 2008 tangible book value (TBV) and Chaucer at 0.9x. Even if the deal was closed at Chaucer’s current share price of 45p this would be 3% dilutive to Brit’s TBV and earnings neutral. However recent press speculation has suggested a price of closer to 55p required by Chaucer which at a valuation of 1.1x book would increase the dilution to Brit shareholders to 13% on TBV and -7% on earnings per share.”

Ferneyhough added that if the acquisition were to go ahead there would be additional risk for Brit in terms of run off longer tail portfolios as well as greater exposure to hedge funds, where Chaucer has invested £150m.

“Chaucer has a couple of run off portfolios which have exposure to D&O, E&O and financial institutions’ business and has over £100m of hedge fund investments in their balance sheet,” said Ferneyhough.

“Given that an all-share offer suggests that capital is somewhat tight at the Brit group, the consolidation of a further capitally constrained group [Chaucer stated £10m excess at year end 2008] with some riskier exposures would bring execution risk to the investment case as well,” she said.

Chaucer added on Friday: “ There can be no certainty that an offer will be made. A further announcement will be made when a conclusion to these discussions has been reached.” In May Chaucer said it was in talks with private equity group Pamplona, founded by Alex Knaster, which was interested in taking a 29.9% of the company. Pamplona partner Paul Thompson told Insurance Times that regulatory rules prevented it from acquiring a larger stake. Taking a larger stake would mean having to make an offer for the whole company.

Both Brit and Chaucer refused to comment further.