Aviva Buys RAC for £1.1 billion

The RAC has agreed to a £1.1 billion takeover approach from insurer, Aviva. Aviva said buying the RAC would boost its Norwich Union insurance business “creating a powerful new combination in insurance and motoring services.” It added that combining Norwich Union and the RAC would allow cost savings of at least £80m a year in 2006. On Tuesday, RAC shares jumped 19 per cent after it said it had received a bid approach. Aviva, UK’s largest general insurer, could be interested in developing the RAC’s promising financial services business, observers said. The company declined to comment.

Aviva will pay 0.7154 of its shares and 462.5 pence in cash for every RAC share, Aviva said today in a Regulatory News Service statement. The combination of Aviva’s UK unit, Norwich Union, and RAC will produce cost savings of 80 million pounds a year in 2006, the company said.

The RAC was a private members’ club for nearly a century until it was bought by the listed car-hire company Lex for £437 million in 1999, resulting in £34,000 windfalls for its 12,000 full-time members. Apart from the roadside recovery service, the RAC’s portfolio of businesses includes the BSM driving school, insurance and financial services and a significant vehicle-leasing business whose customers include BA and the Ministry of Defence.

Emma Ormond, analyst at Oriel Securities, said that the take-out price could mean some aggressive assumptions for the business. “The AA was getting 23 per cent of its profits from personal finance when it was bid for; the RAC is only getting 13 to 14 per cent,” she said.

“We are excited about the revenue opportunities from this combination,” Norwich Union chief executive Patrick Snowball told the BBC. “When it comes to their car, we will help our customers learn how to drive it, buy it, insure it and, if things go wrong, get them back on the road fast.”