RSA still has eyes on new bid as £5bn Aviva swoop is rejected

AVIVA's rejection of RSA's £5 billion takeover approach for its general insurance arm failed to defuse speculation that the predator may raise its offer or seek an agreed lower bid for the target's Canadian business.

Fund managers and analysts believe RSA could be financially stretched by a 5bn rights issue to fund an offer for Aviva's general insurance operations in the UK, Ireland and Canada that would double RSA's stock market value.

But RSA countered yesterday that its contingent rights issue was fully underwritten, and that it considered its mooted offer of 9.8 times historic earnings for the target businesses to be a fair one.

It came as Edinburgh-based life assurer Standard Life, a major shareholder in both companies, suggested an increased bid from RSA would mean "Aviva would have to take that more seriously".

Euan Stirling, investment director at Standard Life Investments, said Aviva's household, commercial and motor insurance business would be very complementary with RSA but that the current offer approach was "opportunistic".

Stirling said if RSA raised its offer, even slightly, "who knows what happens beyond that, maybe the cat's out of the bag then". SLI speaks for 2.78 per cent of Aviva and 3.98 per cent of RSA.

However, other sources said that, although RSA may now take its offer directly to Aviva's institutional shareholders, an alternative was to scale down its ambitions and mount a lower bid for Aviva's Canadian arm.

This would mean a far smaller rights issue for RSA, and a successful deal would make it the biggest general insurer in Canada, they said.

Aviva is the second biggest player in that country and RSA is number five.

"Aviva might be more tempted to sell its Canadian business because it has no life insurance operation there and so no synergies between the two divisions," one source said.

"Some sort of renegotiated partial offer must be a possible. But for the UK, Ireland and Canada, RSA will have to stump up more than they are so far prepared to."

In statement to the stock exchange yesterday, Aviva defended its composite business model of life assurance, general insurance and asset management that RSA has said no other major UK insurer pursues.

Aviva said: "There are significant synergies for Aviva derived from the composite model in terms of a single global brand, cross-selling opportunities and shared back office services."

Some industry analysts have expressed surprise that RSA made its move before the European Commission decides on Solvency 2 capital proposals for the sector later this year.

"It's at that stage that insurers will know how much spare capital they have and what they can do with it, takeovers, share buybacks etc. It would also mean RSA having to raise substantially less on the stock market than they are currently suggesting," one analyst said.