SIGNPOST: KBC buys into Bulgaria's insurance market

By bne IntelliNews January 31, 2007

Nicholas Watson in Prague -

Belgian banking and insurance group KBC announced Tuesday it has agreed to acquire a 70% stake in the Bulgarian insurer DZI Insurance for €185m, seeing off competing bids from Axa, Groupama and Eureko.

The acquisition is part of a broader restructuring of the insurance sector in Central and Eastern Europe that is conforming to the typical pattern for industries in these emerging markets. The first stage inevitably involves a rationalisation of local outfits that involves either some closing down or others banding together to defend their turf before the expected influx of large foreign players. This process is also driven by governments cleaning up the industry in their respective countries and tightening regulations, which in turn encourages more foreign firms to invest.

For this particular deal, the highly acquisitive KBC is buying Bulgaria's leading insurer with a market share in general insurance of 17.7% and in life insurance 26.4%.

According to a statement, KBC plans to launch a public bid for the remaining 30%, which is traded on the Bulgarian stock exchange. The acquisition price represents a discount of 10% over the share price, which has shot up about 140% since the beginning of 2006 on talks of a bid from a Western insurer.

Analysts say the deal works out at a estimated 2007 Price/Earnings multiple of 22x, which seems a bit high given that it represents a 7% premium to the local insurer Ethniki in neighbouring Greece. KBC estimates that the return-on-investment for this acquisition will reach 10% in five years’ time.

"The high price is justifiable, in our view, thanks to the potential for revenue synergies in the form of cross-selling of banking products to the DZI client base, as well as some limited cost synergies with other CEE operations," reckons Jean-Pierre Lambert, an analyst with the US investment bank Keefe, Bruyette & Woods.

Under the terms of the deal, KBC will also pay about €75m to the former owner Kontrakt Sofia to compensate for money received by DZI Insurance for last year's sale of its stake in DZI Bank. KBC will also acquire DZI INVEST, a Sofia-based brokerage.

The deal is subject to approval by the Bulgarian regulatory authorities and DZI said the deal would most likely be finalised in two to three months.

Busy Belgian bees

KBC has certainly been busy of late. This acquisition comes after the buyout of Romstal Leasing in Romania in December for €70m; Swiss Capital, which is the seventh-largest Romanian stock broker with a 3.4% market share; A Banka in Serbia, which was worth €14m when the deal was announced; and 100% of the online broker Equitas, which has a 3% market share of the Budapest market.

"Although this acquisition has little impact at group level, growth prospects for the life insurance segment in Bulgaria are good," says Oddo Securities in a note. "It is probably just the first step in Bulgaria."

The French brokerage says the Bulgarian insurance market is fairly concentrated and its distribution is dominated by brokers and agents: the top-five life insurance players have 81% market share and 68% in non-life – mainly motor insurance like most of Central Europe.

"The specific characteristic of this market is that life insurance penetration is only a quarter of other countries in the region – Poland, Slovakia, Czech Republic, and Hungary," Oddo says.

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