Life and pensions company Chesnara Plc (LON:CSN) has completed the acquisition of Legal & General Group PLC’s (LON:LGEN) Dutch life and pensions arm for €160mln (£136mln).
Legal & General Nederland is a specialist insurer operating in the life insurance and pensions sector in the Netherlands, serving high-end affluent customers. It is open to new business and presents an opportunity for Chesnara to generate profits from an appropriately targeted and profitable product offering.
WATCH: CEO John Deane speaks with Proactive's Andrew Scott
Platform for further expansion into the Netherlands
By Chesnara’s calculation, the €160mln purchase price for Legal & General Nederland represented a 33% discount to Chesnara’s estimate of the economic value (EcV) of the acquired business. The acquisition is expected to increase the Chesnara Group's EcV by some £126.3mln.
The acquisition provides Chesnara with a platform for further expansion into the Netherlands and the directors believe that, as in the case of Waard, Chesnara's first acquisition in the Netherlands in 2015, there is a strong cultural fit between Legal & General Nederland and the Chesnara Group.
“L&G is not a consumer brand in the Netherlands,” chief executive John Deane explained to Proactive Investors. “It’s a name known to IFAs [independent financial advisers]”.
There will be a rebranding, but Deane said Chesnara was not the sort of company to plaster its name all over the shop. In all probability, L&G Nederland’s staff will determine what the new business will be called, and the L&G shield will be retained in some form in the logo to aid recognition.
“The name has got to be right for the market,” Deane told Proactive.
Business will be stickier from now on
In the company’s stock market statement, Deane said: "Chesnara is delighted to be acquiring another well-run and attractive business in the Dutch life assurance market. As with our Swedish subsidiary Movestic, we will be writing protection and pension new business. This will complement our closed book consolidation business Waard.”
Given that the two Dutch companies work in different areas of the life assurance and pensions business, this was not, in Deane’s words, “a synergy deal”.
Dean explained some differences to the IFA market in the Netherlands, saying that writing new business would be “more capital light” in the Netherlands than in the UK, where the set-up is more heavily fee-based.
“Business is also likely to be stickier as a result,” Deane predicted.
The important thing, however, for investors to take on board, in Deane's view, is that the company will be writing new business, adding to the cash flow that supports the company's vaunted dividend policy in those years in between acquisitions, "which seem to turn up every two years or so at present".
As at the end of 2016, Chesnara had cash of £117.1mln and is expected to receive dividends from divisions of £32.7mln,
The company has increased its annual dividend pay-out for 12 years in a row, and is set to pay out around £29.2mln in respect of 2016's dividends, so the divi looks safe for a long time yet, even with the need to fund the L&GN acquisition (£58.3mln in cash) and the group's next debt repayment of £12.7mln.
What the brokers are saying
House broker Shore Capital said the deal was "an excellent outcome for both companies".
Chesnara gains a materially enhanced position in the highly attractive Dutch market at a good price, whilst L&G continues its decluttering of non-core units.
For Chesnara the completion adds around 37p to the year end EcV bringing the figure to 427p per share. The shares currently trade at around 371p.
Pamnure Gordon also waxed lyrical about the purchase.
“We think that this is a superb acquisition that complements its previous Dutch acquisition The Waard Group whilst being both EcV [economic value] and cash/dividend enhancing.”
Its target price rises to 405p from 395p, while ‘buy’ is unsurprisingly the investment view.
Panmure also sees it as positive for the dividend outlook given the cash generative nature of the business and the surplus capital currently within L&G Nederland.
It also provides a complementary platform to its closed life consolidator Waard Group and is fully in line with Chesnara’s stated strategy.
“We view the acquisition merely as a stepping stone to the next acquisition which we think should be welcomed by shareholders given Chesnara’s excellent acquisition track record.”
Added protection
Deane regards the probability of any liability arising from the policies it has taken over as very low, but has, as might be expected, insured against it anyhow.
L&G has given an indemnity in respect of any losses, damages, costs, liabilities and expenses suffered by Chesnara or Legal & General Nederland arising out of claims from (former) customers of Legal & General Nederland in relation to Woekerpolis, up to a maximum amount of €60 million.
“We’re indemnified against a ‘black swan’ event,” Deane told Proactive.
The share price
Chesnara shares now are almost exactly where they were at the start of 2017, but that doesn’t tell the whole story.
The shares have been in recovery mode since the EU referendum when – like many UK companies –they slipped, dipping to 250p.