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Delta Lloyd should hold out for higher offer from NN Group, analysts say

would raise its€5.30-per-share takeover bid for Delta Lloyd NV if its fellow Dutch insurer holds out fora better deal, analysts told S&P Global Market Intelligence.

Theall-cash offer, announced Oct. 5, values Delta Lloyd at €2.4 billion, a 29%premium over the €1.85 billion that the company was worth at market close theday before the bid. But Joost van Beek, an analyst with TheodoorGilissen Bankiers, told S&P Global Market Intelligence that Delta Lloydshould consider NN Group's offer only an "opening bid."

"Thisis a first offer to make it public and to put additional pressure on DeltaLloyd's management to go for it," he said. He added that he sees scope forNN Group to increase its bid to about €6 per share, valuing Delta Lloyd at€2.77 billion, given the cost savings to be made by merging the two groups' ITdepartments and back offices.

"[There's]a 70% or 80% chance that it will go ahead," he said. "I would expecta higher bid, but after that [Delta Lloyd] management has to come up with areally convincing story in order not to go for it."

DeltaLloyd shares rose 28% in Oct. 5 trading to €5.28, almost in line with NNGroup's bid of €5.30, although still a far cry from the more than €14 per shareat which the company traded for much of 2014.

DeltaLloyd's economic value could amount to as much as €5.2 billion, more thandouble what NN Group is offering, CreditSights analysts wrote in a note toinvestors, describing the bid as "opportunistic." They said theyexpect some core Delta Lloyd investors to decline the offer and force NN Groupto return with a superior one.

"Inour view, this is not a done deal," they wrote, predicting a "bumpyroad" for NN Group in its negotiations.

A long-awaited bid  

DeltaLloyd, a former unit of Aviva, has been the subject of M&A rumors for some time, including onesinvolving NN Group. It completed a €650 million rights issueearlier in 2016 to bolster capital levels that had fallen toward the lower endof its European insurance peer group, although NN Group is still far morestrongly capitalized.

NNGroup's Solvency II ratio was252% at the end of June, meaning that it has more than twice thecapital needed to meet regulatory minimums. Delta Lloyd's Solvency II ratio atthe same juncture was 173%.

Combiningthe balance sheets of the two companies "makes sense from a solvency pointof view," RBC analyst Gordon Aitken wrote in a note shortly after the bidwas announced. "We view NN as too strong[ly capitalized] while Delta Lloydis weaker."

NNGroup said it would suspend its current €500 million share buyback program inlight of the bid, which it plans to finance from existing cash resources andexternal debt. But its sturdy capital levels should enable it to finance the purchasewithout requiring the issuance of much debt, said Martina von Terzi, an analystwith Deutsche Bank.

Thedeal also presents considerable benefits from a cost savings perspective andfrom the point of view of capital management, von Terzi said in an interview.

NNGroup said combining Delta Lloyd with its Dutch and Belgian operations wouldcreate a leading player in the Dutch insurance, banking and asset managementmarkets, adding €60 billion of AUM and €6 billion in bank assets.

"Wethink that the additional scale in pensions will allow us to capitalize evenmore on the opportunities," CEO Lard Friese told analysts and journalists."Doubling in size in nonlife will allow us to drive further underwritingimprovements and cost efficiencies."

DeltaLloyd said in a statement that it had acknowledged the offer and was reviewingit with financial and legal advisers.