A bid for Aviva? For about the first 20 years of the existence of this insurance mashup – a three-way merger at the turn of the century, constructed around the old Norwich Union – its shareholders would have jumped at a chance to be put of their misery.
Few FTSE 100 managements disappointed their investors so often, or paid themselves such obviously absurd bonuses. Aviva was eclipsed at every turn by the crisis-free progress of its rivals Legal & General and Prudential.
Today, though, is a different matter. Amanda Blanc, the chief executive since mid-2020, has completed a cleanup operation that took Aviva out of eight international markets and slimmed the operation to the UK, Ireland and Canada – places where it is either big or expects to generate good returns on capital, or both. Almost £5bn was returned to shareholders from the disposals. Friday’s dividend promises – at least £915m this year and “low- to mid-single digit growth” thereafter – are also far more credible than in the past.
Why, then, is the group viewed as a takeover candidate? Mainly because the fiddly disposal job has been done and the shares now look cheap on conventional metrics. Even after the bump in the share price on Friday’s rumours, the dividend level implies a yield of 8% – which ain’t bad for a company that is number one in the UK in general insurance (cars and home, primarily) and is expected to keep generating excess cash.
The soggy stock market rating probably owes much to distrust of life assurance and pensions in general – the part where Aviva makes the other half of its profits. The underlying asset portfolios tend to contain large commercial property holdings, where UK valuations are currently weak. Alternative explanations include the unloved status of the UK economy, the UK stock market and financial services firms as a whole.
Yet a takeover bid for Aviva at a rumoured 600p would still be a stretch and a half. First, that would be a 50%-ish premium and any acquirer might do serious damage to its own valuation by paying so much. Second, the German financial services group Allianz, the most plausible of the suggested names because it is so big, is already number two in general insurance in the UK, which would very likely mean a long and unpredictable competition inquiry.
Anything’s possible, of course, and the persistence of takeover chat around Aviva this year suggests somebody, somewhere is at least wondering whether the arithmetic can be made to work. The best advice to Blanc and co, though, is surely to not get drawn into distracting games of tentative “what if?” conservations.
Selling large and highly-regulated insurance companies – Aviva is worth £11bn currently – is complicated and time-consuming. If somebody wants to slap a fully-funded, highly-priced bid on the table, fine, you are obliged to talk. But Aviva these days is not the ailing entity of old. It does not need a rescuer.
