Here’s a safe prediction: a sale of RSA Insurance to Zurich, or any other foreign bidder, would produce not a single howl of anguish about a great British company being sold overseas.
Insurance for cars and homes doesn’t stir patriotic juices like chocolate (Cadbury’s) or pharmaceuticals (AstraZeneca). The industry is utterly unloved on account of a business model that relies on sufficient numbers of punters being too dozy to notice the price rises slipped into renewal quotes. And, in RSA’s case, everybody has always understood that chief executive Stephen Hester’s task is to generate hard value for long-suffering shareholders by whatever means necessary.
Zurich has called earlier than some expected, but Hester’s strategy since February 2014 could almost have been designed to declutter RSA and attract a bidder. He launched a rights issue at the outset to buy himself some time, and negotiating room, during a disposal programme. But then he dispatched small units overseas at impressive speed: the Baltics, Poland, Thailand, China, Singapore, Italy and India have gone.
Meanwhile, the Irish business has been detoxified after its reserves scandal. Outsiders can now see the attractive parts – the UK, Canada and the Scandinavian operations – more clearly.
Perhaps the ideal time to sell would be after another round of self-help measures, meaning cost-cutting. But Zurich is at the door now and the capital demands for all insurers are under regulatory review. Hester will know that the bulk of his shareholders expect him to do his duty: talk to the Swiss and see if the likes of Axa and Allianz wish to play. One bidder is nice; More Than one would be better.
Melrose places rivals in shade with Elster sale to Honeywell
The Melrose crew make it look disarmingly simple: buy a strong but overweight engineering company, knock it into shape and then sell for a tidy profit.
Elster, a meter business being sold to Honeywell for £3.3bn, joins a long list of triumphs from a management team that started its routine at Wassall in the 1990s. There is a fair argument that this deal is one of the best in the collection. Melrose paid a 40% takeover premium to remove Elster from the US stock market for £1.8bn in 2012. Three years later, its equity investment has risen 2.3 times in value and, by way of a cherry, Honeywell is taking not only Elster’s pension fund but also a couple left over from past Melrose deals.
What’s the secret? That is the arresting part since Melrose claims to do nothing that other owners could not. For example: give managers direct accountability, close loss-making factories and stop divisions encroaching on each other’s patches. Sceptics detect a whiff of asset-stripping but the record doesn’t show it: investment at Melrose companies tends to exceed depreciation.
At least £2bn of the Honeywell cash will be returned to shareholders while management plots the next adventure. It’s a roundabout way to proceed since, once a target is spotted, Melrose will want fresh funds. But the technique keeps the arithmetic clean and gives investors sight of what they’re buying.
On this occasion, it may also encourage Melrose to wait for prices in the sector to fall before it makes its next purchase. Elster is departing at 14 times last year’s earnings, which is a fine price only from the seller’s point of view.
Biomass, the budget and Drax logic
Three weeks after George Osborne’s budget, Drax chief executive Dorothy Thompson remains shocked. The removal of renewable generators’ exemption from the climate change levy was “an about-turn in a well-entrenched policy that has been a key underpinning for renewable investments since 2001”.
Fair comment. The 22% decline in Drax’s share price since the budget, notwithstanding Tuesday’s 10% bounce, illustrates the size of the surprise at Osborne’s handiwork. Thus Thompson turned the interim results into an extended plea for the delights of biomass, the fuel gradually replacing coal in Drax’s power station.
Transporting wood pellets from North America doesn’t tick every box in the green-energy checklist but Thompson is correct to say that power from biomass has the key benefit of reliability. If there’s a lot of wind and solar capacity on the grid, we will need biomass, or something similar.
Whether this argument will be heard by government is anybody’s guess. Official policy is still to continue the madness of underwriting the world’s most expensive nuclear power station at Hinkley Point in Somerset. It makes no sense. Biomass is neither perfectly green nor cheap, but its economics look vastly better than nuclear’s.
