Homeserve in takeover talks with Domestic & General

Homeserve has opened talks with smaller rival Domestic & General as the home emergency services provider looks to bulk up its product offering to include extended warranties for domestic appliances.

Shares in Domestic & General surged late last week on rumours that the company was a bid target, forcing Homeserve to admit yesterday that it had made a preliminary approach for the company. Domestic & General has a market valuation of £456m with analysts arguing that a bid in excess of £500m looks likely.

Homeserve provides emergency help for customers that have problems at home such as flooding or the need to change the locks after a burglary.

It has a small business that offers extended appliance warranty services but sees Domestic & General as a means to accelerating its ambition to provide "total home emergency cover".

Domestic & General provides extended warranties on a variety of household appliances including boilers, showers and white goods.

Homeserve said it would look to transfer the underwriting risk to an insurance partner, in line with its business model. Homeserve has partnered with insurance company Axa to outsource the underwriting risk in other parts of its business.

Shares in Domestic & General gained a further 5 per cent but Homeserve shares closed over 8 per cent lower as investors fretted over the potential size of the deal compared to its £1.3bn market valuation and the potential merits of a tie-up with its smaller rival.

Charlie Cottam, an analyst with Panmure Gordon, said that a deal to buy Domestic & General was always a possibility as the company looks to expand its routes to market.

He said the company's strong balance sheet means it would not need a rights issue to fund the acquisition. He said that Domestic & General operates in a low-growth area but that Homeserve could justify the deal by transferring its more efficient insurance model to its rival.

Homeserve was spun out of South Staffordshire Water three years ago and competes with the likes of Centrica in the home emergency services market.

Last year, it spent more than £30m on acquisitions, including a purchase of Pilkington's glazing division.

The company provides nationwide coverage and operates a fleet of red vans that can be dispatched to a customer's premises in case of an emergency.

Brian Whitty, the chairman of Homeserve, said the potential deal would require regulatory approval but remained confident that the combination of the two companies would be cleared.

Homeserve reported that revenue increased 30 per cent in the year to the end of March to £477m with pre-tax profit rising 22 per cent to £61m.

The company described the US market as "exciting" and extended a trial of its services in Spain.