So much for the Swiss being a bunch of cheese-eating, cuckoo-clock design artists whose idea of a dangerous sport is Alpine yodelling. Turns out they’re a lot ballsier than they look, or at least the ones from Zurich Insurance.
Stock markets spent Monday in meltdown, with the latest from the China crisis triggering the biggest global sell-off since 2008, just the thing to blow up most deals. So how did Zurich chief Martin Senn react? By demonstrating that cash is king in these markets and raising his mooted offer for RSA Insurance to £5.6 billion, or 550p a share (reports, pages 35, 38). The upshot is a board recommendation, assuming nothing turns up while Zurich sifts through the books. Not to mention the likely exit of RSA boss Stephen Hester, the former RBS chief, before he’s even finished his turnaround.
Sure, he’s done a decent job so far, to judge by the half-year results. Mr Hester pitched up in February last year after an Irish accounting scandal, with the shares barely above £4, since when he’s rebuilt the balance sheet and capital ratios and got shot of businesses in Asia. Now he’s unveiled headline pre-tax profits up 317 per cent to £288 million, while restoring a 3½p interim dividend. He didn’t ask Zurich to come knocking, either.
Yet, now it has, it looks game-over. The RSA board has already bumped up Zurich’s offer from about 500p and it won’t go higher. Indeed, Zurich’s relying on £175 million of synergies by 2017, on Nomura analysis, to ensure the deal meets its 10 per cent return on investment target. Meantime, despite RSA having four advisers — Goldman Sachs, Warshaw Robey, Bank of America Merrill Lynch and JP Morgan Cazenove — none has yet produced a rival bidder. What’s more, analysts can’t see much better than 40p of earnings per share by 2017, however good Mr Hester’s turnaround. Put that on a typical RSA multiple of 10 to 12 times and that’s a max 480p a share.
So 550p cash, some 30 per cent above the average price the month before Zurich showed up, would be hard to refuse, not least for investors who backed last year’s £750 million cash call at an ex-rights price of 415p. Sure things could still scupper this deal, so keeping Mr Hester out of the frame for the Barclays job. Yet if Zurich’s willing to take on these markets, it must be keen.
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Dig that yield
Few companies know better than BHP Billiton what it’s like to be at the coalface of the great Chinese slowdown. The mining giant’s got a third of its sales there, which may explain why the shares have taken a hammering: down 44 per cent in 12 months, even after yesterday’s 5 per cent rise on Beijing’s latest interest rate cut and some resilient full-year results.
True, the headline figures looked ghastly, with operating profits from continuing operations down 62 per cent to $8.7 billion. Yet, dig deeper and BHP is still producing an underlying ebitda margin of 50 per cent, despite the tanking commodity prices, highlighting the quality of its mines. Meanwhile, its cost-cutting exploits were impressive: $4.1 billion of productivity gains two years ahead of schedule. Add continuing capex cuts and BHP produced $6.3 billion of free cashflow, just about covering the $6.6 billion dividend, up 2 per cent.
Chief executive Andrew Mackenzie promises more efficiency gains, now BHP has spun off second-tier commodities into a new listed company, South32, to focus on iron ore, copper, coal, oil and potash. He’s less bearish than many, too, on China, even if he might be talking his book. Its transition from an export and investment-led economy to one focused on consumers will hit demand for iron ore, with BHP cutting its forecast for peak Chinese steel demand. But it should boost appetite for energy, copper and fertilisers.
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That 7.7 per cent yield on BHP shares is starting to look attractive.
Supermarket sweep
How disappointing. Since February, four of the Competition and Markets Authority’s pointiest heads have been enjoying the novel experience of shopping. They’ve been hanging around in Poundland and 99p Stores, fearlessly examining the shelves to see whether a £55 million merger affecting 0.4 per cent of the UK retail market will ruin the lives of British shoppers.
Well, guess what? Philip Marsden (a lawyer), Tim Tutton (an energy economist), Katherine Holmes (another lawyer) and John Krumins (a banker) have finally come to the same conclusion as everyone else: it won’t make a blind bit of difference.
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They’ve found other shops also sell the stuff the two retailers stock and that maybe people don’t set out to buy things at “a single price point”. And there we were thinking they’d at least find a monopoly in £1 ornamental garden hedgehogs. Or that Poundland would jack up the price of that 99p Heritage Bird Box.
True, for a while the quartet had everyone going by suggesting Poundland might have to get shot of 80 stores, while taking the whole thing to a phase-two inquiry. Such wind-up merchants at the CMA.
A right charmer
People have lost a bit of money lately, despite yesterday’s stock market rally. So how nice of Sir Richard Branson to pop up and remind everyone how rich he is, with a blog entitled: How I Bought Necker Island.
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He blagged an all-expenses trip there in 1978 and even took a “girl” he “had fallen for” (now his wife). The vendor asked for $6 million, so the cash-strapped Virgin king offered $100,000, as you do. A year later, the vendor dropped his price to $180,000. Not everyone will find that story as charming as he does.