How much will Zurich pay for RSA?

Stephen Hester's turnaround at struggling insurer RSA has begun to show signs of working, but low interest rates, a strong pound and fierce competition have made life tough. The shares had fallen over 8% since we said the share rating looked generous, but confirmation that Zurich Insurance is mulling a bid may be about to put shareholders out of their misery.

Shares in the old Royal & Sun Alliance traded over five times higher than current levels in the late 1990s until a pensions mis-selling scandal plunged the shares close to 200p over the next four years. The 300-year-old insurer nearly went bust, and a subsequent recovery was never that convincing.

Since 2007, the share price has halved amid profits warnings, accounting problems at the Irish division, and £773 million rights issue. However, having fallen as low at 392p earlier this month, rumours of a takeover worth 600p did the rounds. On this occasion, the gossips were right.

"Zurich Insurance Group notes the recent market speculation in relation to RSA Insurance Group plc and confirms that it is evaluating a possible offer for RSA," the Swiss giant said Tuesday. "This announcement does not amount to a firm intention to make an offer under Rule 2.7 of the Code and there can be no assurance that any offer will be made."

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Zurich must announce a firm offer by 5pm on 25 August or walk away.

RSA has been a perennial underperformer and a tie-up with Zurich would make good strategic sense. But what would RSA shareholders get for their trouble?

"We believe that an offer of around 1.8x to 1.9x NTAV [net tangible asset value] would be reasonable given recent M&A activity in the sector," says Panmure Gordon analyst Barrie Cornes. "Based upon our 30 June 2015 forecast NTAV of 304p/share we estimate a take-out price of 547p to 578p with a mean of 563p or a 29% premium to the closing price last night."

But with RSA now in play, other potential suitors may want a look at the books.

"We think that RSA's core businesses of UK, Canada and Scandinavia all hold attractions whilst the Latin American business could be sold off for c£400m to £500m as has been speculated previously," says Cornes. "We think that AXA or a number of other US and European insurers could be interested but that interest would top out at 1.9x NTAV."

*RSA has since issued a brief announcement: "RSA has not held talks with or received a proposal from Zurich and shareholders are advised to take no action."

An update on trading performance and strategic progress will be made at the interim results on 6 August.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.