Despite large number of bidders, lower than hoped valuation likely
By Ian Fraser

WITH a race to acquire RBS's insurance businesses starting early this week, sources close to the deal have warned that a large field of bidders is unlikely to result in the Edinburgh-based bank achieving much more than its £7 billion target price.

Prospective bidders for the auction, run by investment banker Goldman Sachs in tandem with Merrill Lynch, include Warren Buffett's Berkshire Hathaway reinsurance group and a private-equity consortium of Apax Partners and Kohlberg Kravis Roberts.

The RBS insurance businesses, which include Direct Line, Churchill, Privilege and Green Flag, have a dominant share of the UK general insurance market and so offer potential synergy savings. Overall, they had a 32% market share of UK motor insurance premiums in 2007. Their direct sales model is seen as a further attraction, particularly by insurers that have failed to make this approach work themselves. The package also includes 50% stakes in direct sales insurers in Italy, Germany and Spain.

Other trade buyers that are said to be bidding include American International Group, Generali, Mapfre, Sampo and Zurich Financial Services. Other private-equity bidders may include Blackstone, Candover, Cinven and JC Flowers. On April 22, RBS chief executive Sir Fred Goodwin said the bank intended to offload its insurance businesses to help raise its core capital ratio above 6%, in the wake of the ABN Amro acquisition and the subprime crisis.

However, several leading insurers have ruled themselves out of the bidding, including Munich Re and the UK insurers Aviva and Royal & SunAlliance.

Analysts at Keefe Bruyette & Woods warn that the valuation achieved is going to be constrained by the fact that UK retail motor insurance has gone "ex-growth" in terms of policy count. There is also the small problem that Direct Line's premiums are rising by less than 2% a year, compared with 9.5% at rival group Admiral.

RBS for its part is open to a wide range of options including a packaged sale, a partial sale or even joint venturing the businesses. However, if the total sum offered falls below £7bn it is almost certain to hang on to the businesses.

The RBS insurance group turned in marginally reduced profits in 2007 because of flood claims. Profits fell from £964 million in 2006 to £902m in 2007. It employs 18,000 people, mainly in the UK.

Mark Oldcorn, head of European insurance at investment bank Credit Suisse, said: "Banks are now acknowledging that the value they offer in the insurance chain is through their distribution power rather than producing the insurance products themselves. But the backdrop to that realisation is of course the current crisis, which has forced many of them to face up to the fact that they are light of capital."

Separately, it is expected that Spain's Bankinter will seek to acquire RBS's 50% share in the Spanish insurance joint venture Linea Directa, invoking a "change of control" clause in its joint venture agreement with RBS Insurance.

Meanwhile, it has emerged that RBS sold a £1.1bn parcel of private-equity assets last December, bundled into a new vehicle, the RBS Special Opportunities Fund, to a group of secondary private equity buyout houses including London-based Coller Capital, Switzerland-based Partners Group, Alpinvest and US-based HarbourVest.

The deal was designed to shore up the bank's balance sheet and improve its capital ratios.