Assicurazioni Generali’s agreement to buy fellow Italian insurer Toro for €3.85 billion ($4.82 billion) has come as a surprise to some market observers.
There are indications that the company itself had not planned the acquisition and acted on the spur of the moment. On March 6, Generali set out a three-year strategic plan in which it listed one of its aims expansion in new territories, such as China, India and central and Eastern Europe. The company also revealed plans for a €1.8 billion share buy-back.
But the acquisition of Toro goes against these two points in the plan. Toro, a non-life firm, operates solely in Italy and so will only strengthen Generali’s presence in its home market – Generali will become the biggest non-life insurer in Italy ahead of Fondiaria-SAI. And part of the funding for the acquisition will be €1.7 billion originally earmarked for the share buy-back.
“I think it was a surprise not only to us but also to Generali,” says Thomas Noack, an analyst at investment bank WestLB Equity Markets. “Back in March the company did not know what would happen. I think the deal has come by chance and is a short-term deal.”
The acquisition has received a mixed response from the market. Some analysts have criticized the acquisition. Investment bank Fox-Pitt, Kelton downgraded its rating on Generali’s stock to in line from outperform because of the announcement. It appears the bank was hoping for a more exciting deal.
“The acquisition does not alter the strategic footprint but precludes management’s ability to do something more interesting should the opportunity have arisen,” wrote FPK analysts Christopher Watson and Bob Yates in a report.
The FPK analysts also complain that the cancellation of the share buy-back removes a potentially positive influence on the share price and goes back on the strategic plan Generali revealed in March. They add that the terms of the deal look very generous.
Investment bank Exane BNP Paribas also downgraded Generali’s stock to neutral from outperform.
Others are more upbeat. “Generally the deal is quite positive,” says Noack at WestLB. “The good thing is this is a non-life-driven or motor-driven deal and Generali has the chance to become the non-life market leader in Italy.”
Another positive is that Italian non-life business is profitable at the moment. Noack argues that the acquisition of Toro allows Generali to capitalize on this and also gives it the power to keep prices high. “Generali as the market leader will have the chance to keep the profitability high for a few years,” he says.
Noack also believes the acquisition will not prevent Generali pursuing its growth strategy outside Italy. “It will still have the same level of excess capital after the deal so it will still have the opportunity to buy something abroad,” he says.
Generali’s share price fell slightly to €27.3 on Monday, the day after the acquisition was announced, from €27.7 on Friday, June 23.
Under the terms of the acquisition, Generali will buy the 55.5% of Toro owned by the De Agostini Group, an Italian publishing company, for €21.20 a share. This will cost Generali €2.1bn. De Agostini also has the option to sell a further 10% of Toro to Generali at the same price. This will cost Generali €385.5 million.
Generali will then launch a public cash offer for the outstanding shares, again at the same price. After this, Toro will be delisted from the Milan stock exchange and its insurance business merged into Generali’s.
As well as using €1.7 billion originally set aside for the share buyback, Generali will fund the acquisition with €700 million in resources not used to buy out minority shareholdings in the company’s subsidiaries, €1.2 billion from a new hybrid bond issue, and €255 million from existing resources.