Recent media reports suggesting French insurer Axa is keen to buy Swiss insurer Winterthur from Credit Suisse have elicited mixed reactions from equity analysts. Some believe that the deal could hold up financially, but many think it makes little strategic sense for Axa.
News reports said that Axa and Credit Suisse had begun initial talks about a sale of Winterthur, despite Credit Suisse’s previous assertions that it would float the insurer in an initial public offering.
Tim Dawson, equity analyst at Swiss investment bank Helvea, thinks a deal is unlikely based on Axa’s record. “Historically Axa has bought into growing markets or distressed businesses,” he says. “Winterthur is neither – its business is now in reasonable shape and it operates in a very mature market.”
Although he is reluctant to rule out the possibility of a sale at the right price, William Hawkins, equity analyst at investment bank Keefe Bruyette & Woods, also has doubts about the likelihood of a deal. “It is not unusual for a bid to emerge during an IPO process to help the selling shareholder crystallise a good price,” he says in a report.
This is not the first time Axa has been linked to Winterthur. Axa and Credit Suisse were rumoured to be in talks about a possible sale of Winterthur in November 2004. “Given that Axa has probably been in the Winterthur data room in the past and walked away, and given that Credit Suisse intended to retain a substantial share in a quoted Winterthur to benefit from future upside potential, we treat the current press stories with healthy scepticism,” said Hawkins in his report.
Equity analysts Mikir Shah and Bob Yates at Fox-Pitt Kelton are more upbeat about the potential for a deal. “The potential acquisition of Winterthur seems to have considerable momentum,” they said in a report. “In our view, such a deal would stand up financially in terms of return on investment, earnings stability and solvency and is financially manageable.” But they concede that the deal is not an obvious fit with Axa’s acquisition strategy.
Hawkins and the Fox-Pitt, Kelton analysts agree that Axa could get a good price for the Swiss insurer if Credit Suisse is concerned about the impact of stock market volatility on a possible Winterthur IPO.
Other positives for Axa from the acquisition would include diversification and the resulting reduction in aggregate capital requirements. Buying Winterthur would give it additional operations all over Europe, including eastern Europe, where it is yet to establish a presence. And it would give Axa Winterthur’s 25% share of the Swiss non-life insurance market.
On the downside, Axa may be less keen to invest in Switzerland because of its limited potential for growth. Winterthur also still has exposure to old North American business, which Axa has sought to avoid in the past.
“For large insurance groups in Europe the issue is growth not profitability,” says Dawson, “and that is why I don’t believe this sale will happen at this time.”