UPDATE 2-Fairfax to buy all of Zenith in $1.4 bln deal

Thu Feb 18, 2010 9:58am EST

* Fairfax offers a premium of 31.4 pct on Zenith shares

* Zenith shares surge 30.5 pct at open

* Fairfax to raise $200 mln in share issue (Adds details, CEO comments, share price. In U.S. dollars unless noted)

TORONTO, Feb 18 (Reuters) - Fairfax Financial Holdings Ltd (FFH.TO) said on Thursday it will buy all the shares of U.S. insurer Zenith National Insurance Corp ZNT.N that it does not already own in a deal worth about $1.4 billion.

The acquisition, which represents a premium of more than 31 percent on Zenith's Wednesday closing share price, will make Zenith a wholly owned subsidiary of Toronto-based Fairfax.

Fairfax currently holds an 8.23 percent stake in Zenith, according to Reuters data. Zenith specializes in workers' compensation and has struggled during the financial crisis as employers have laid off workers.

Zenith shares shot up 30.5 percent to $37.74 shortly after opening on the New York Stock Exchange, while Fairfax shares ebbed 0.1 percent to C$367.99 on the Toronto Stock Exchange.

Fairfax, which deals in property and casualty insurance and reinsurance, has seen its equity investments pay off in recent quarters and had said it would look at all options, including acquisitions, to put its strong capital base to work.

The company said it will raise $200 million in a share sale, but still expects to maintain about $1 billion in cash and marketable securities at the holding company level.

Fairfax Chief Executive Prem Watsa said Zenith would continue to operate from its California headquarters and would maintain its strategic and operating philosophy under Chief Executive Stanley Zax.

"Zenith will continue to operate its business as it has always been run under Stanley's excellent leadership, with investment management centralized at Fairfax. All other Fairfax group companies will continue to operate independently on a decentralized basis," Watsa said in a statement.

Fairfax has been taking advantage of the financial struggles of rivals to boost its stable of insurers and reinsurers. It recently bought the remaining shares of Connecticut-based reinsurer Odyssey Re Holdings Corp it didn't already own for about $1 billion.

($1=$1.04 Canadian) (Reporting by Andrea Hopkins in Toronto and Anurag Kotoky in Bangalore; editing by Peter Galloway)