Dutch insurance isn't usually something to set pulses racing. Yet NN's announcement on Wednesday of an unsolicited $2.7 billion proposal for Delta Lloyd sent the target's shares soaring 30 percent, their biggest jump on record.
With few other obvious bidders in the wings and shareholder patience tested by a recent rights issue, Delta's management doesn't look to have too much bargaining power. Engaging with NN may be the best way to shake out a sweetener. An aggressive attempt to stay independent might lack credibility.
Strategically, a deal has merit. Insurers are feeling the squeeze of ultra-low interest rates and tougher capital rules. Low growth and pricing pressure mean those with cash to spend, such as NN, want to bulk up. Since its 2014 IPO, NN has splurged on buybacks and dividend payouts totaling 2.1 billion euros ($2.4 billion). The company reckons buying Delta for a similar price would boost market share, cut costs and offer a "significant" lift to earnings.
And at first glance, the premium looks just about okay, if flattered by Delta's recent bad run. A proposed price of 5.30 euros per ordinary share is 29 percent above Tuesday's close. That compares relatively well with recent deals, such as the 36 percent bump offered by Mitsui Sumitomo when buying Amlin, or the 15 percent one-day premium for Aviva's tilt at Friends Life.
Delta's share price on Wednesday -- hovering around the proposed offer -- gives a multiple to book value of 0.67, according to Bloomberg data, second only to Generali in a basket of peers.
Yes, you could argue that the premium is less generous when you consider Delta shares have been in the doldrums lately, so it might hope to squeeze a bit more from NN. But it's hard to see too much here that will let it push for a much higher offer.
There's little euphoria about the idea of Delta being "in play". Analysts don't think there are obvious counter-bidders with the necessary cash reserves. And even if Delta has moved on to surer footing operationally -- returning to profit in the first half -- going it alone might be the worse option. A tie-up with NN would help cut more costs and provide a stronger balance sheet for its growing pension business, according to Bloomberg Intelligence's Edmond Christou.
Frayed relations with investors make matters even trickier for Delta. It's had a pretty rocky 12 months, with tough markets pushing it to raise capital from shareholders at a discount in March. Investor anger went public, with Highfields Capital Management opposing the rights issue.
This gives an opening to a buyer. But it doesn't preclude haggling on that 5.30 euro offer. The average cost per share for the Highfields stake, for example, is estimated at 7.92 euros, according to Bloomberg data. For Taiwan-based Fubon, another leading investor, it's estimated at 11.66 euros. Still, engaging with NN might be the best way for them to cut their losses. Management has to weigh this risk.
So, while NN's opening salvo doesn't look like a take-it-or-leave-it offer, Delta doesn’t have much room to play hardball. Its big shareholders will probably call the shots.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Lionel Laurent in London at email@example.com
To contact the editor responsible for this story:
James Boxell at firstname.lastname@example.org