CGU insures itself

CITY TALK
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The Independent Online
THE pounds 14bn merger of insurance companies General Accident and Commercial Union should not, as one wag suggested, be dubbed commercial accident. Indeed, the general reception for the deal has been remarkably warm. The price rises to both companies' shares ahead of the deal suggest that the market saw a merger as a jolly good thing. But what must not be overlooked is that this is essentially a defensive ploy.

Inspired by the onslaught from cheaper, low-cost rivals, the initial success of CGU, as the new entity will be called, is predicated almost entirely on cost savings. Some 5,000 jobs worldwide, 3,000 of them in the UK alone, will lead to savings of pounds 225m a year. In market terms, that could be worth more than pounds 2bn.

But there has to be more on offer, if the future is to be a place where two and two equals five, and not just four. Aside from the strategic considerations, one intriguing question is whether the orphan assets - potentially worth hundreds of millions - in the combined life funds of the two groups will see a distribution to policyholders.

While shares of some regional press groups have been on a roll over the last year, it has been a different story at Southnews, where the price has come off from a high of 520p, although it is recovering from its low of 390p in June.

Nevertheless, the pounds 47.5m acquisition of USP, United News and Media's regional newspaper business in the South-east, may fail to create the impetus to see the shares outperform.

Shareholders will have to cough up to help fund the deal, and while there will be cost savings and synergies, USP already has impressive margins (16 per cent), only a tad below Southnews's 18.6 per cent. Although the shares trade at a discount to many of its peers, there is probably better value elsewhere in the sector.

The other great stock market debate of the week has been the demerger of Courtaulds. The market was convinced of the merits of the deal - witness a rampant share price, up 22 per cent to 331p after the deal was made public.

Most analysts spent Wednesday tapping out sum of the parts valuations for the demerged group. Essentially Courtaulds is to float off its coatings business. Shareholders will receive one share in the business for every one they hold in the old group, which will consist of the fibres business. The polymers business is to be sold off.

It has been trumpeted as a demerger made in heaven, yet there have been naff demergers in recent years: Hanson, in parts, Thorn and EMI, and ongoing problems at Lonrho - the longest running demerger in town - still unresolved.

Let's get this right: any demerger, as for any business move, entails risk, as well as reward. The Courtaulds share price had plunged by over a third in the last year alone. Surely the paradox that the stock market seriously undervalued Courtaulds to the point where the valuation had lost all touch with reality should set alarm bells ringing? For if the undervaluation was nonsense, the case that the shares are now worth pounds 4 and upwards could be just so much hype.

The spin on the deal has been of transparency and flexibility, enhancing shareholder value. Two years on, it may all look very different.

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