Business Analysis: Regan is back in business but City is sceptical of bid for RSA

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The Independent Online

Shares in Corvus Capital, the investment vehicle controlled by Andrew Regan, surged 16.3 per cent yesterday after it issued formal confirmation of its interest in bidding for Royal & SunAlliance (RSA), one of the country's oldest and most venerable insurance groups.

After failing to buy the Co-op in a bitter and acrimonious £1.4bn takeover battle in 1997, and after being acquitted of allegations of theft and bribery in 2003, Mr Regan is intent on making a comeback.

Buying a FTSE 100 insurer is one way of doing that but the chances of him pulling off a £2.4bn-plus acquisition of RSA were looking increasingly remote last night.

While the reaction of the Corvus share price proved that the scale of Mr Regan's ambitions impressed parts of the stock market, shares in RSA barely budged, suggesting that many investors feel this particular transaction remains out of Mr Regan's reach.

A statement from Corvus, in which Mr Regan acquired a 28 per cent stake in September, set out its ambitions and confirmed that RSA was in its sights.

"Corvus intends to acquire (either as principal or in partnership) a sizeable company with a proven stable and strong cash-generating business or businesses, which the board believes has significant inherent value which is not reflected in its prevailing market value.

"In line with this strategy, Corvus continues to evaluate a number of potential investment and acquisition opportunities, of which RSA is one. Considerations in relation to RSA are at a preliminary stage and there can be no guarantee that any offer will be forthcoming," the company said.

Mr Regan, a one-time food industry entrepreneur who set up his first business after leaving school at the age of 17, is keen to leave behind the Co-op episode and the ensuing court cases - he was forced to stand trial three times.

Anyone meeting Mr Regan is confronted by a quietly spoken, mild-mannered man quite at odds with the rapacious corporate raider portrayed by the Co-op which, eight years ago, was caught off-guard by Mr Regan's takeover plans.

A lumbering mish-mash of retail and financial services businesses, the Co-operative Wholesale Society, since renamed the Co-op Group, had turnover of £3bn when Mr Regan made his attempt but profits of little more than £46m.

Mr Regan wanted to buy it, pay off its 200,000 members with a demutualisation windfall of about £1,500 each, and re-engineer it as a modern business. The Co-op's then chief executive, Graham Melmoth, was having none of it and enlisted the help of powerful friends in Parliament and the City to defeat the 31-year-old upstart.

An early-day motion was signed by 50 MPs denouncing Mr Regan as an "asset stripper", while Mr Melmoth turned to Brian Keelan, one of the City's most powerful bankers, to lead the defence.

The whole episode descended into allegations of wrongdoing when confidential Co-op documents changed hands at an infamous car park meeting.

Mr Regan was then pursued by the Serious Fraud Office which prosecuted him over allegations of theft and bribery relating to one of his previous companies, Hobson. After three trials Mr Regan was acquitted. A civil damages case brought by the Co-op was settled out of court this year.

Mr Regan and his advisers believe the media's interest in his past will eventually fade. Trying to buy one of the UK's biggest insurers is a clear sign that he is confident the Co-op affair and its fallout should no longer be an issue for the stock market.

After all, insurers are one of the most heavily regulated groups of companies in the country. The Financial Services Authority keeps them on a tight leash. It demands anyone controlling an insurer pass two statutory tests. The first is that the acquirer is a "fit and proper" person to have control. The second is that the interests of consumers would not be threatened by the acquirer's control.

Any bid from Corvus for RSA, or any other large company, would probably involve keeping the bid target as a quoted entity. Corvus would launch a reverse takeover, issuing shares to those RSA shareholders who wanted to stay in under Mr Regan's leadership for whatever value he believed he could unlock.

Cash would be available to pay those shareholders that wanted out, financed by bank debt, with the whole enterprise underpinned by investments from private equity funds and wealthy private individuals.

Yet why Mr Regan should want to buy RSA remains a mystery to most in the City. Many analysts believe it would be impossible for the company to be taken private. With any buyer requiring regulatory authorisation for each of the markets in which RSA operates, analysts believe that only a similar-sized or larger insurance rival could make a credible bid for the group.

Even if Mr Regan thinks he can manoeuvre around this obstacle, there remain a number of clouds hanging over RSA which make it a pretty risky venture. One prominent City analyst said he had not assigned a recommendation to the stock for the past two years, because the string of uncertainties that surround it have made it impossible to value.

The biggest of these worries is the vast number of potential claims threatening its US business. Although RSA's US operations are now essentially in run-off, it is impossible to calculate with any certainty how hard it may be hit by workplace-related asbestos claims from older policies. Although the company has been busy beefing up its reserves over the past few years, the worst-case scenarios are still enough to make any buyer think twice.

In the UK, there is also the problem of RSA's sizeable pension fund deficit, which totalled almost £700m at the latest count. With the enhanced powers awarded to pension fund trustees this year, any acquirer could find itself forced to make good the entire pension fund deficit as part of the terms of a takeover - enough to wipe out any discount which the buyer may have negotiated in the price tag.

While the RSA management is widely regarded as doing a good job at getting the business in shape, the significant legacy issues continue to make it a risky target. Even when rumours of a much more credible bid - from American International Group - emerged in the autumn, analysts were quick to dismiss the deal as a non-starter. If Mr Regan succeeds where he failed with the Co-op, the City will be truly amazed.