CGU weighs up cash and shares bid for Royal & Sun

CGU, the composite insurer, is preparing to sound out shareholders about a cash-and-shares bid for Royal & SunAlliance, the rival insurance group, after an initial merger approach was rejected earlier this year.

Bob Scott, the chief executive of CGU, approached RSA four months ago about a no-premium deal, only to be told by Bob Mendlesohn, the chief executive of RSA, that, having already done one no-premium merger within the last three years, the group was not interested in a deal on those lines.

However, Mr Mendlesohn left the door open to talks on an agreed offer if CGU came back with a straightforward bid offering a reasonable premium for RSA shareholders.

At the time Mr Scott - known in the City as Hurricane Bob because of the speed with which he managed the integration of the General Accident and Commercial Union business - was reluctant to go down that route.

But given the continued underperformance of RSA's shares, Mr Scott may change his mind. CGU is the larger group in stock market terms, valued at pounds 12bn compared with RSA's pounds 8.1bn. Mr Mendelsohn, who is believed to want to return home to the US, is understood to have indicated that he would be willing to stand aside should CGU come back with a serious offer.

The original approach is understood to have come shortly after Royal & SunAlliance made its unsuccessful bid for Guardian Royal Exchange, when RSA was left exposed by shareholders' lack of support for the bid.

One banker said yesterday: "It is the ideal deal. Royal & SunAlliance still has a strong business in the UK. If CGU does not do it, then someone like Allianz will."

CGU refused to comment on the RSA bid talk, but Philip Twyman, the finance director, said last week at that CGU wanted to expand in life and pensions, sectors where RSA has been growing sales.

The decision for Mr Scott is finely balanced. City analysts have reacted coolly to suggestions at the weekend that CGU is considering a bid for its rival, arguing that Royal & SunAlliance is far from the ideal catch. Moreover, although Mr Scott might be willing to go hostile, there are doubts whether he could get the full backing of the board for such a move.

There has also been talk of competition concerns, although given the highly-competitive nature of the general insurance market these may not be insuperable.

Strategically, however, CGU needs to address the fact that compared with the big Continental insurance groups such as Allianz and Axa, it is relatively small. Now that GRE has been snapped up by Axa for pounds 3.5bn, RSA is the only sizeable UK composite still available and a deal with RSA is probably Mr Scott's only option if he wants to remain a player in what is becoming an increasingly global game. Unlike RSA, CGU has a serious presence in continental Europe.

Before the merger last year CU bought Groupe Victoire, one of France's largest insurers, and it has a significant presence in Holland through Delta. RSA has recently expanded in the Nordic region through its pounds 300m takeover of Trygg-Hansa in Sweden, but its presence in Europe is minimal.