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China blast hits Zurich’s plan to buy RSA

RSA

RSA – click to enlarge, source: LSE

The week got off to an awful start for RSA shareholders after Zurich announced it was pulling out of a proposed £5.6 billion bid, sending shares in its target 20% lower.

Zurich has blamed difficulties in its general insurance business which specifically relates to last month’s massive explosion in the Chinese container port of Tianji which will tip the division into a $200 million operating loss for the quarter.

RSA had optimistically backed a mooted 550p a share bid but Zurich’s decision wiped £1.2bn off the British company’s market cap as the shares fell from 509p to 390p. Bargain hunters lifted the shares to 405p as investors pondered over a rival buyer stepping in.

Will it happen? There are a few positives for new predators to think about. RSA has continued to deliver against its turnaround plans since Zurich indicated an interest in July, including the sale of its Latin America business for £403 million cash. It also said Zurich “had not found anything that would have prevented them from proceeding with the transaction on the terms announced on 25 August 2015.”

Some analysts are bearish on its prospects and believe the CEO Stephen Hester was denied the opportunity of a quick turnaround and sale of the business. They say he now has to prove his plan will work against the weak probability that it will result in much growth in the business.

At 405p the shares trade on 14 times forward earnings, in-line with the sector. However, a prospective dividend yield of 2.4% is below the sector average of 3.8%

Shareholders must hope that the consolidation still gripping sector will see another buyer step in. RSA is back in the shop window and other potential suitors include Germany’s Allianz and Italian insurer Generali.

* These comments do not constitute any recommendation to buy or sell shares.

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