LONDON (Reuters) – Lloyd’s of London insurer Brit Insurance (BRE.L) made an all-share proposed offer on Monday for peer Chaucer (CHU.L), in a bid that values the company at 220.6 million pounds ($363.6 million), and pushed Chaucer shares over 5 percent lower.
Brit said it will offer 0.23 Brit shares for each Chaucer share, valuing a share at 40.25 pence, based on the closing price of 42 pence on Friday.
But analysts warn the proposal, nearly a third below the group’s book value, is unlikely to be popular with Chaucer shareholders and is further undermined by a positive trading update from the UK company on Monday.
“We do not believe that at a 30 percent discount to Chaucer’s FY09E book value, this offer is likely to make Chaucer’s existing shareholders happy… shareholders can get better returns elsewhere in the sector,” said analysts at Noble Research.
Chaucer said in a separate statement that it recommends shareholders to take no action, which would see them gain 29 percent stake of the enlarged business, whilst it discusses the proposed offer with a number of shareholders ahead of any further announcements.
“This is unlikely to cut any ice with Chaucer shareholders who will receive no premium at all in exchange for a change in ownership, simply a stake in a 2.3 billion pound premium income entity,” said Charles Coyne at FinnCap.
Brit, which is currently in the process of shifting its tax base to the Netherlands from Britain, said the proposal is conditional on a recommendation from the board of Chaucer.
However, Brit faces competition from private equity firm Pamplona Capital Management, which is in discussions with Chaucer regarding a possible stake sale.
Chaucer said on Monday its premium income is ahead of budget for the first five months of 2009 whilst it has benefited from an absence of major catastrophes compared to last year.
The company, which suffered from hedge fund exposures last year, forecasts premium rates to increase by nearly 6 percent in 2009 for its underwriting portfolio.
It added that its hedge fund investments are now down to 7.7 percent of the portfolio and should represent less than 4 percent by the end of the year.
Since the group’s 75 million pound ($123.6 million) fundraising in January, Chaucer has increased capacity at its principal Syndicate 1084 by 15 percent whilst premium income is up 39 percent year-on-year.
Chaucer said in January it received a potential merger offer, after the company was hit by rising claims and a weak investment performance, with profits for the six months to June 30 2008 slumping 90 percent.
Lloyd’s-listed peer Novae Group (NVA.L) confirmed its interest but later pulled out of merger talks with Chaucer in March, saying the deal was not in the interests of its shareholders.
Analysts warn that any merger between Lloyd’s companies, operating in similar lines of business, may be plagued by a clash of underwriting and management cultures.
“Given that both Chaucer and Brit currently have very similar business models, this will remain a significant risk if the Brit-Chaucer deal goes through,” said analysts at Noble.
Shares in Chaucer were down 5.36 percent at 0853 GMT whilst shares in Brit were 1.71 percent higher. ($1=.6067 Pound)
(Reporting by Lorraine Turner; Editing by Hans Peters)