Laggard of sector deserves second look

AND so the great tidying-up exercise continues. Fresh from selling part of its stake in Dutch unit Delta Lloyd for £381m, Aviva has offloaded its roadside rescue business RAC for £1bn.

Analysts said it had done well to sell the unit on a price to earnings multiple of 17 times, considering its own stock trades on seven times. It bought RAC on a similar multiple back in 2005, but has made around £500m worth of disposals since then, suggesting it has got a good price from private equity buyer Carlyle.

This kind of deal – where a big financial services firm sells a non-core asset to a private equity player – will become more commonplace in the months ahead. Banks and insurers are divesting peripheral businesses to raise cash and adhere to new capital requirements. Because they are all in a scramble for capital, they are unwilling to purchase off of each other. That means private equity houses, backed by revived debt markets, are the obvious buyers.

For Aviva, the rationale behind the deal is simple. It wants to focus on its general insurance business and the extra liquidity will strengthen its balance sheet, allowing it to invest in priority markets such as Spain.

Shares in the insurer – the laggard of sector – closed virtually flat yesterday.

While Aviva is not going to be high growth in the short term, due to its reliance on more mature markets, it is cheap on a price-to-earnings basis, trades at a discount to both its net asset value and its enterprise value and has a high dividend yield which is well covered.

We think the stock deserves a second look.