Aviva pares down non-core assets with £1bn RAC sale to private equity

INSURER Aviva is selling its RAC roadside rescue business to private equity for £1 billion as the group continues to shed non-core areas to focus on insurance.

The buyer is the Carlyle Group, which believes it can boost returns at the famous motoring business, the UK's second-biggest breakdown recovery group.

The auction was sharply contested, with Carlyle trumping two rivals - Clayton Dubilier & Rice and BC Partners - to win control of RAC.

Aviva revealed yesterday that it expected to book an accounting profit of 600 million from the sale.

It said it would use the proceeds to beef up its balance sheet and invest in its main insurance markets.

Eamonn Flanagan, an analyst at Shore Capital, said that - taking into account the 500m Aviva had made from selling off parts of the RAC business - the Carlyle deal was "a major result" for the insurer.

The deal means that, in the space of 12 years, the Royal Automobile Club has gone from being mutual owned by its members to a PLC (Lex Services) to the subsidiary of Aviva to private equity.

Andrew Moss, Aviva's chief executive, said the deal realised "significant value for our shareholders" and provided the financial flexibility to deepen Aviva's presence in markets where it already had "strength and scale".

Andrew Burgess, managing director at Carlyle, said there was strong potential to grow RAC, partly by cross-sales into household insurance. Carlyle has experience in insurance though investments including China Pacific Insurance Group and Grupo Qualicorp.

John Smith, a fund manager with Brown Shipley who holds Aviva shares, commented: "It is a reasonable transaction for shareholders. It unlocks value and it was never really clear where RAC fitted within the Aviva business."

RAC has 4,000 staff and has its head office in Birmingham. Last year it made a pre-tax profit of 82m.

Aviva, which operates in 30 countries, has been trying to boost profit by concentrating on 12 markets where it is strongest.

The insurer has walked away from less profitable businesses in Italy and the United States. The company also cut its stake in Dutch unit Delta Lloyd in April, netting 381m. Aviva said yesterday it was confident of meeting its near-term financial targets.

Under the details of the deal, Carlyle is paying 17 times RAC's net earnings last year.

Aviva will retain RAC's under-funded pension scheme, seen as a potential sticking point for any sale.

The scheme had a deficit of 160m at the end of 2010. On completion of the transaction, Aviva will make a one-off contribution of 67m. Aviva's shares closed down 3.4p at 432.3p.