Aviva in £1bn sale of RAC business to private equity

Aviva said it expects an accounting profit of £600m from the sale of the UK’s second-largest breakdown recovery group, and will use the proceeds to strengthen its balance sheet and invest in its main markets.

Brown Shipley fund manager John Smith, who holds Aviva shares within his portfolio, said: “It is a reasonable transaction for shareholders. It unlocks value and it was never really clear where RAC fitted within the Aviva business.”

Ray Jacobs, RAC Unite branch secretary, said: “The branch welcomes the news which brings to an end a period of speculation and uncertainty for members.

“We look forward to continuing our strong partnership relationship with the RAC management team and are optimistic about developing the same relationship with The Carlyle Group.

“The branch feels that this is a great opportunity to move the business forward and for all colleagues to share in our future success”.

Aviva, which operates in about 30 countries, has been trying to boost profits by concentrating on the 12 markets where it makes most money.

As part of its plan, the company has walked away from less profitable businesses in Italy and the US.

The company also cut its stake in Dutch unit Delta Lloyd in April, netting £381m.

Aviva, which has around 4,800 Yorkshire employees, said yesterday it is confident of meeting its near-term financial targets.

Its shares have risen by around 10 per cent over the past six months and by nearly 30 per cent over the past year.

By contrast, shares in rival Prudential have risen three per cent and 25 per cent over the same two periods, respectively.

The auction process for RAC was fiercely fought with Carlyle battling rivals Clayton Dubilier & Rice and BC Partners to be the first private equity firm to get its hands on the business.

The final price tag of £1bn is thought to value RAC at more than 10 times earnings before interest, tax, depreciation and amortisation (EBITDA). To finance the buyout, JPMorgan, BNP Paribas, Credit Suisse, Morgan Stanley and UBS are understood to have underwritten a £520m loan and a £100m credit facility.

Carlyle sees the possibility of growing the RAC’s roadside rescue business, Britain’s number two behind the AA with more than seven million members, and running it more efficiently.

Andrew Burgess, managing director at Carlyle, said: “There is also strong longer term potential to grow the business by investing in new and innovative financial services offerings such as motor and household insurance.”

Carlyle has experience in the insurance sector through investments including China Pacific Insurance Group and Grupo Qualicorp.

Aviva will retain RAC’s underfunded pension scheme, seen as a potential sticking point for any deal.

The scheme had a deficit of £160m at end-December and, on completion, Aviva will make a one-off contribution of £67m.

Last month Aviva reported a storming performance by its motor and household arm after the division secured more than £1bn of UK sales in the first quarter of the year.

The group said general insurance was its “real highlight” of the first three months of the year, maintaining momentum to report its fifth successive quarterly increase.

General insurance sales increased 20 per cent to £1.09bn for the quarter as car insurance premium rates and the firm’s customer numbers both continue to climb.

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