RSA shares fall 20% after Zurich U-turn on takeover

Stephen Hester misses out on £8.5m bonus

In abruptly ending its courtship of the British insurer RSA, suitor Zurich Insurance opted for the corporate equivalent of the traditional break-up cliche: "It's not you, it's me."

That will have provided scant comfort to RSA boss Stephen Hester, however, as he watched its shares plunge by more than 20 per cent, wiping £1 billion from its stock market value and taking the shares below the level at which they were trading before news of Zurich's interest emerged two months ago.

Zurich abandoned its pursuit of RSA little more than 24 hours before it would have been required, under City takeover rules, to launch a formal offer. Its justification for the unexpected U-turn appears limp, to say the least – a $275 million hit from the massive explosion at the Chinese port of Tianjin last month.

It's a hefty loss, but insurance is all about the unexpected, and is $275 million really enough to derail a deal that would have been the biggest seen in the insurance sector in 15 years; a deal that Zurich boss Martin Senn had launched so enthusiastically just a few weeks earlier?


But Zurich has other problems too, and warned as it abandoned the RSA bid that profits in its general insurance business have been weaker than expected over the first half, a trend it expects to continue in the third quarter. As well as the Chinese loss, Zurich revealed it is taking a $300 million hit on its US car business.

RSA, which owns the More Than brand, moved swiftly to reassure investors it was indeed all about Zurich rather than because of the emergence of any nasties at the British insurer during the due diligence process.

Due diligence

Zurich had confirmed, it said, that the due diligence findings were “in line with their expectations and, while the process had not been finally concluded, they had not found anything that would have prevented them from proceeding with the transaction”.

Stressing that the approach from Zurich had been “unsolicited”, RSA said it would continue with its turnaround plan, and that trading in July and August had been ahead of expectations. The board and management “look forward to the future with confidence”, it added.

Hester and his team at RSA are putting a brave face on the Zurich debacle but there’s a tough road ahead for them as they continue with the task of restoring the business to full financial health following a series of disposals of its under-performing businesses.

The 550p-a-share offer from Zurich would have provided a neat shortcut to restoring shareholder value for RSA investors. With the shares currently trading at little more than 400p, it’s likely to be quite some time before they return to anywhere near that level under their own steam.

When the Swiss first made their approach to RSA, there was talk in the City that rival bidders would emerge, talk which at one stage looked likely to force Zurich to raise its terms to nearer 600p. But, as the weeks went by, no rivals emerged.

The departure of Zurich also comes at a hefty personal cost to the RSA chief executive. Hester, the former boss of Royal Bank of Scotland, took over the top job at the insurer a year and a half ago, after the damaging accounting scandal at its Irish business forced the resignation of group chief executive Simon Lee. RSA had to inject £200 million into the Irish business, which is now under investigation by Britain's accounting watchdog, the Financial Reporting Council.

Lucrative chunk

Hester was in line to collect about £8.5 million when the Zurich deal went through, thanks to a lucrative chunk of performance-related shares. It’s not the first time Hester has missed out on a bonus – as head of bailed-out


, he was forced to waive a £1 million payout in 2012 after intense political pressure.

There could be an even bigger price to pay, however. Hester has been widely tipped as a potential new boss for Barclays, which has been without a chief executive since the unceremonious sacking of Antony Jenkins in July. The search is under way for a new chief executive, with chairman John McFarlane filling the gap in the meantime.

Hester certainly has the experience to take on the role and, with RSA handed over to Zurich, the timing for such a move would have been perfect. Of course, he could still jump ship, assuming Barclays wants him, but it would leave his job at RSA unfinished. Fiona Walsh is business editor of