* Validus says unable to agree to merger talk conditions
* Begins exchange offer to buy Transatlantic stock
* Shares fall in early trading, both bids at discount (Updates shares, deal values)
NEW YORK, July 25 (Reuters) - Reinsurer Validus Holdings Ltd (VR.N) took its $3.2 billion offer to buy Transatlantic Holdings Inc TRH.N directly to shareholders on Monday after rejecting its rival's conditions for merger talks.
It was the second time in two years that Validus launched a hostile bid for a reinsurer that had already agreed a deal with someone else. In the previous case, Validus ultimately prevailed in its efforts to buy underwriter IPC.
Validus said it was unable to start discussions with Transatlantic because of a "standstill" provision that would have prevented it from pursuing its bid without the approval of Transatlantic's board.
"They sent us this confidentiality agreement they knew we'd never sign," Validus Chief Executive Ed Noonan said in an interview.
Noonan said he has spoken to the "vast majority" of Transatlantic's largest shareholders and received good feedback, but has not yet talked to Davis Selected Advisers, which owns nearly 24 percent of Transatlantic and has said it may oppose the company's already agreed deal with Allied World Assurance Company Holdings Inc.
Last week, Transatlantic reaffirmed its deal with Allied World (AWH.N), which is worth $3.05 billion at Monday afternoon's share prices. But Transatlantic said it was possible Validus's offer could lead to a superior proposal and it would approach Validus to open talks.
Transatlantic accepted Allied World's bid on June 12. Validus made its unsolicited cash-and-stock bid on July 12. Transatlantic said on Monday it still considered Allied's bid superior and it recommended shareholders not take any action yet on the Validus offer.
Validus's exchange offer for Transatlantic's stock will end on Sept. 30, unless extended.
At midday Monday, Transatlantic was down 0.6 percent at $52.19 and Validus was off 1 percent at $27.43. Allied World reversed earlier losses and was up 0.2 percent at $55.76.
At those levels, both the Allied World bid and the Validus proposal represent a discount to Transatlantic's shares. The Validus bid remains just over 3 percent higher than the Allied offer, however.
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Should Validus succeed, the newly combined company would be the world's sixth-largest reinsurer.
Reinsurers sell insurance to insurers for their exposures, letting them offset some of their risk and freeing them up to write more policies.
Roughly three-quarters of Validus' business would be exposed to short-term risks such as hurricanes and roughly one-quarter to longer-lasting perils such as medical malpractice and workers' compensation, what the industry calls "long-tail" risk.
Some analysts have said long-tail exposure was a problem for Validus, part of the reason Validus shares have fallen more than 11 percent since the company made its bid.
Something similar happened in 2009, when Validus stepped in to snatch up IPC from its deal with Max Capital. Shares fell sharply once Validus made its offer and did not recover to pre-bid levels for nearly five months.
Analysts and investors have been saying the Bermudan reinsurance market was ripe for consolidation, with too many companies holding too much capital and competing for too little business.
Yet most agree the Transatlantic bidding war is a unique case and not a spark for further deal making, as valuations across the island remain too depressed to make acquisitions attractive. [ID:nN13142656] (Reporting by Ben Berkowitz in New York and Jochelle Mendonca in Bangalore; editing by Joyjeet Das and Andre Grenon)