Warren Buffetts Berkshire Hathaway has bought a 3.7% stake inInsurance Australia Groupfor A$500 million (249 million) as part of a partnership that IAG said would reduce its capital requirements and support its return on equity targets, Reuters reported on Tuesday.
Assuming no discount to their market price, Berkshire Hathawaycould take a 3.7%% stake in each of Aviva and Prudential for a total of up to 2.2bn after all, neither stock is particularly expensive at present.If Mr Buffett isnot up for it, there remains a chance that private equity may eye stakes in either British insurer, in my view.
The market doesnt seem to price in such an outcome, though and here lies the opportunity.
High synergies is the name of game at Aviva following its 5.6bn takeover of Friends Life. Its not to say that such a strategy earned it a round of good publicity, but thats the inevitable way forward, which appeared clear since first deal rumours emerged at the end of November.
A capital raising in disguise, as the deal waslabelled by some analysts, the tie-up is more than that its an attempt aimed at rendering Aviva an even more efficient entity on its cost base.The market has yet to be convinced that its strategy would work: Avivas stock price has gone nowhere in the first half of the year.
Its lowly relative valuation, however, could make it an appealing target for Mr Buffett and private equity. When Mr Buffett makes a move, others tend to follow (as usually happens when the laggards try to catch up with the leaders).
Apollo Global Managementis mimicking Warren Buffetts investment strategy by using its recent $1.8bn takeover ofAvivas US fixed annuity business to build an insurance operation with more than $60bn in assets, the Financial Times reported in November 2013.
Now it may not be too different: a 4% stake in Aviva would cost up to 800m.
Theres a lot of interest in the private sector for insurance assets, and Prudential would benefit from an investor like Buffett after the departure of its chief executive, a senior rainmaker in New York told me in the wake of the IAG deal. Private equity interest also makes a lot of sense.
Prudential has not done much better than Aviva in recent months on the stock exchange. A 4% stake in Prudential would cost up to 1.6bn, although eager buyers would have saved a fortune had they invested 12/24 months ago.
The story could repeat in a couple of years time, my source concluded.
Investors are not entirely convinced that Aviva and Prudential will draw the attention of strategic buyers,but Buffetts latest move signals that the valuation of the sectors leaders may appreciate at a faster pace than in the past on the back of investment targeting some of the biggest players in the industry.
The same applies to several other companies outside the insurance sectorthat could be targeted by Mr Buffett and private equity: consider these value names, whose trading multiples point to bargain territory in this market.
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