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Analysts split on Scor value after failed Covéa offer

Equity analysts are divided on whether French mutual group SGAM Covéa's failed €43-a-share offer for Scor SE undervalued the company.

Scor swiftly rejected the offer, saying Sept. 4 that it reflected neither the company's intrinsic nor its strategic value. At Scor's investor day Sept. 5, CEO Denis Kessler criticized the timing of Covéa's offer and fiercely defended Scor's status as a listed, independent entity, insisting that it was "intimately linked" to the company's growth and success.

He doubled down on those comments at the annual reinsurance Rendez-Vous in Monte Carlo on Sept. 9, telling journalists that "Scor doesn't need to merge," given that it is profitable and "not in a crisis state."

Scor shares traded below €34 apiece for several months through mid-August, but rose sharply at that point, and again after the takeover rumors began swirling. Having closed at €34.91 on Aug. 31, Scor jumped to €38.83 at the Sept. 4 close and finished the week at €37.20.

However, Jefferies analyst Philip Kett said in a research note Sept. 4 that rather than leap on a bid in the range of Covéa's, "investors should patiently await a higher valuation." He added: "We believe that Scor should command a higher premium and support management's rejection of the offer.

Jefferies has a buy recommendation on Scor's shares and a price target of €38 a share.

Kett noted that the offer values Scor at 12.3x Jefferies' forecasts for Scor's 2019 and 2020 earnings and 1.34x book value. He said the valuation compares unfavorably with the recent average takeover multiple of 1.53x book value, based on deals such as The Hartford's planned acquisition of Navigators and Axa's takeover of XL. A valuation of 1.53x book would yield a price for Scor of €49 a share, Tett said, while adding that an "appropriate takeout level would be nearer to €45-€46" after adjusting for intangible assets.

UBS, which has a neutral rating on Scor's shares, was less convinced that the Covéa offer undervalued Scor. In a Sept. 5 research note, UBS analyst Jonny Urwin said, "Based on the current outlook it looks challenging for Scor to reach €43 organically on a 1-3 year view."

He said that although Scor is well-placed to benefit from increasing investment yields on U.S. bonds, "we expect reinsurance pricing conditions to deteriorate, which makes us less bullish [than management] on the outlook."

More to come?

As well as lambasting Covéa's approach, Kessler on Sept. 5 also urged analysts and investors to "forget the recent distracting events. It's over." Baader Helvea Equity Research analyst Daniel Bischof said in an interview that Kessler had given "quite a clear answer" about the value of Scor's independence and that, given Covéa has made clear that it will not pursue a hostile takeover, "it looks like they put an end to this."

Bischof said he felt that the valuation of Scor was "within [the range] we have seen in other transactions, maybe slightly at the lower end."

UBS's Urwin suggested in his research note that, despite Kessler's comments, there may be more of the story to unfold. "We note Scor is not a forced seller, but we expect further developments with consolidation accelerating," he wrote.

Bischof expects the M&A wave sweeping the global reinsurance market in general to continue. He said: "In a market where there is abundant capacity, the rationale of taking assets out of the market and combining them is quite obvious. I wouldn't be surprised if there is more M&A in the pipeline."