June 23, 2011 / 12:15 PM / 8 years ago

Aviva to sell RAC for 1.6 billion to Carlyle Group

LONDON (Reuters) - Aviva (AV.L) is to sell its RAC roadside rescue business to private equity firm The Carlyle Group CYL.UL for 1 billion pounds ($1.6 billion), as the British group continues scaling back from non-core areas to focus on its insurance operations.

A man walks past an AVIVA logo outside the company's head office in the city of London March 5, 2009. REUTERS/Stephen Hird

The auction process was fiercely fought with Carlyle battling rivals Clayton Dubilier & Rice and BC Partners BCPRT.UL to be the first private equity firm to get its hands on the business in a rare, so-called primary deal.

Aviva said on Thursday it expected an accounting profit of 600 million pounds from the sale of Britain’s second-largest breakdown recovery group, and would use the proceeds to strengthen its balance sheet and invest in its main markets.

Its shares were down 0.5 percent at 1210 GMT.

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

The final price tag of 1 billion pounds valued RAC at more than 10 times earnings before interest, tax, depreciation and amortization (EBITDA), said a person familiar with the matter.

It was underpinned by strong appetite from debt markets to provide financing for a deal, with leverage multiples of up to seven times EBITDA harking back to deals done at the peak of the buyouts boom five years ago

To finance the buyout, JPMorgan, BNP Paribas, Credit Suisse, Morgan Stanley and UBS have underwritten a 520 million pound loan and a 100 million credit facility, another person familiar with matter said.

Carlyle sees the possibility of growing the RAC’s roadside rescue business, Britain’s number two behind the AA with more than 7 million members, and running it more efficiently, the first person 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,” said Andrew Burgess, a managing director at Carlyle.

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

Aviva, which operates in about 30 countries, has been trying to boost profit by concentrating on 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 United States.

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

Aviva said on Thursday it was confident of meeting its near-term financial targets.

Aviva will retain RAC’s underfunded pension scheme, seen as a potential sticking point for any deal. The scheme had a deficit of 160 million pounds at end-December and, on completion, Aviva will make a one-off contribution of 67 million.

Its shares have risen around 10 percent over the past six months and nearly 30 percent over the past year. By contrast, shares in British rival Prudential Plc (PRU.L) have risen 3 percent and 25 percent over the same two periods, respectively.

JP Morgan Cazenove (JPM.N) advised Aviva on the deal, while Lazard (LAZ.N) worked for Carlyle.

Additional reporting by Isabell Witt; Editing by Dan Lalor

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