Royal and Sun seal pounds 6bn merger
Insurance shares race ahead on speculation of wave of takeovers in the industry
Saturday 04 May 1996
Analysts said the merger raised doubts about the long-term independence of Guardian Royal Exchange, the smallest composite left in the sector.
There was speculation that GRE could be a target for European insurers, including the Dutch company, Fortis, the French insurer Axa, and Generali, the Italian firm.
One analyst said: "This definitely puts pressure on GRE. I would not be surprised at an announcement from them in the near future, either in relation to a merger with Commercial Union or General Accident, or a takeover from another source."
GRE shares rose 38p to 271p, General Accident was up 25p to 647p and Commercial Union, until the new deal Britain's largest general insurer, rose 25p to 615p. At those prices GRE is worth pounds 2.5bn, Commercial Union pounds 4.1bn, and General Accident pounds 3.1bn.
The consultancy Datamonitor forecast that nearly a third of general insurers would fall victim to mergers or acquisitions and a similar contraction has already been widely predicted in the life assurance industry.
The merger now makes Prudential the hot favourite to take over Friends Provident, in the wave of consolidation sweeping through the life assurance industry.
The life mutual with pounds 15bn under management was until recently thought to have been closely stalked by Sun Alliance.
The merged Royal Sun Alliance is expected to renew its search for a mutual to buy after its own deal goes through in August, because the combined weight of the two companies' life operations is much lower than their share of the general insurance market.
Arthur Hayes of Sun Alliance, who is to be an executive director of the merged group, said "maybe at some time in the future we will return to looking at mutuals".
On the life assurance side, the combined company will only be sixth in annualised premium income.
With the merger costing 5,000 jobs, most of them in the UK, over the next two years, the two companies said they expected cost savings of pounds 175m a year by 1998, to set against one-off costs of the restructuring of the same amount - giving a one year payback. The companies have 28,000 staff in the UK, 22,000 of them in mainstream insurance which will reduce to 17,000 to 18,000, and their world-wide total is 45,000.
The combined company will be the UK's largest general insurer and it will also be the ninth largest composite insurer in the world - leaping from 23rd place for Royal and 25th for Sun Alliance.
The all share deal was generally welcomed in the City, because there has been a widespread recognition that the UK insurance market has too few large international players. The overlap between the two in overseas markets is also small. Both have plans to expand in India and China.
The merged group had worldwide premium income of pounds 9.4bn and net profits of pounds 1.026bn last year on pro forma accounts.
After their shares leapt yesterday - Royal by 67p to 437p and Sun Alliance by 55p to 414p - the total market value was pounds 6.1bn, of which pounds 2.8bn was Royal and pounds 3.3 bn was Sun Alliance. Total assets are pounds 55bn including pounds 45bn of funds under management.
Under the terms of the merger, holders of 1,000 Royal shares will own 1,067 Royal Sun Alliance shares, while 1,000 Sun Alliance shares translate into the same number in the new company. Royal shareholders will then own 46.4 per cent and Sun Alliance 53.6 per cent of the combine. However, unlike takeovers or mergers of mutual societies there will be no cash bonanza for policyholders.
Roger Taylor, the chief executive of Sun Alliance who as deputy chairman is to be the top executive director in the merged group, said he did not believe the merger would be put on ice by a UK monopolies inquiry. He conceded there was a possible problem in one specialised type of engineering insurance where the combined share is 45 per cent. This is the business of insuring and inspecting boilers.
But he said that while the combined share of household insurance approaches 25 per cent, this only included members of the Association of British Insurers, and when other competitors were taken into account the share would be 20 per cent.
Mr Taylor acknowledged the merger came within the orbit of the European authorities, which would examine the competition implications.
The new "super-insurer", Royal Sun Alliance - whose name has to be cleared with the Home Office because of the use of the word Royal - will be twice the size of the next two largest composite insurers General Accident and Commercial Union.
Both have a UK market share of about 7 per cent. GRE is in fourth place with about five per cent.
Stephen Dias, insurance analyst at Goldman Sachs, said: "From the numbers, it is a good deal for both sets of shareholders. It is well balanced. It is quite clear that some advantage could be gained from the difficult UK marketplace."
Comment, page 19
Financial comparison of the companies
Royal Insurance Sun Alliance
1995 1994 1995 1994
(pounds m) (pounds m) (pounds m) (pounds m)
Net premiums written:
- general insurance 3,524 3,589 3,571 3,402
- long-term insurance 1,029 1,117 1,262 1,237
- total 4,553 4,706 4,833 4,639
Pre-tax profits 498 467 546 347
Shareholders' funds 2,676 1,882 2,640 1,768
Dividend total 16.0p 12.0p 17.25p 15.75p
Earnings per share 60.0p 61.9p 44.0p 26.9p
Number of UK employees 12,743 15,825
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