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Zurich poised to expand in U.K. with proposed bid for rival

Zurich poised to expand in U.K. with proposed bid for rival

Zurich Insurance Group Ltd.'s tentative bid could spark competing offers for RSA Insurance Group P.L.C. and, should Zurich ultimately be successful, result in the sell-off of some of RSA's business to improve the deal's total cost.

Zurich's “possible” all-cash offer for the London-based multiline insurer made last week would value RSA at about £5.6 billion ($8.79 billion), a proposal the Swiss-based insurer had been mulling for weeks.

RSA said it would be willing to recommend the offer — £5.50 ($8.63) per share —subject to due diligence and resolving certain undisclosed terms.

RSA also said shareholders would receive an interim dividend of 3.5 pence (5.5 cents) per share.

While the United Kingdom's Code on Takeovers and Mergers would have required Zurich to indicate firmly that it would or would not make an offer for RSA by the end of business Aug. 25, RSA said it had requested and the panel had granted extending the deadline until Sept. 22 to enable both parties to continue discussions on terms and conditions.

“Accordingly, the board is in discussions with Zurich in relation to these terms,” RSA said in a statement.

In the meantime, Zurich reserved the right to offer less than £5.50 per share for RSA.

The deal would be a “reasonable price” for RSA, said Ming Zhu, an analyst at Canaccord Genuity Group Inc. in London.

Because it is a good price for RSA shareholders, the deal now seems “inevitable,” said Eamonn Flanagan, head of the Liverpool, England office of Shore Capital Group Ltd., although there still is the possibility of a counterbid from another European insurer.

Although terms of the deal still need to be agreed upon, a deal bringing together Zurich and RSA deal is getting closer, said Sami Taipalus, an analyst at Berenberg Bank in London.

“In our view, the bid represents excellent value for RSA shareholders” and is “at the upper end of the acceptable range” for Zurich. “While RSA offers a good strategic fit for Zurich, we think significant faith will be required in the delivery of synergies to make the financials of the transaction attractive,” Mr. Taipalus said.

A deal would enhance Zurich's position in the U.K. nonlife insurance market, but Zurich may look to sell certain RSA assets to achieve its target return on investment of 10% on the transaction, analysts said.

Such assets include Scandinavia, where RSA has a much bigger presence than Zurich and Zurich may look to offload that business, analysts said.

Selling off RSA's Scandinavian units could allow Zurich to claw back about half of the price it likely will pay for RSA, Mr. Taipalus said.

“Given the poor strategic fit of RSA Scandinavia with Zurich, this option looks very attractive in our view,” he said.

“We'll see whether this is another value-accretive or value-destroying acquisition,” said one market source who asked not to be named.

There likely would be challenges in integrating the two businesses that have different cultures, he added.