UPDATE 5-Transatlantic sues Validus, rejects offer

Thu Jul 28, 2011 3:32pm EDT

* Transatlantic says Validus proxy false, misleading

* Affirms Allied World deal

* Transatlantic lawyer trots out proven tactic (Adds Validus response, 6th paragraph)

By Ben Berkowitz and Tom Hals

NEW YORK/DELAWARE, July 28 (Reuters) - Reinsurance company Transatlantic Holdings Inc TRH.N said on Thursday it sued unsolicited suitor Validus Holdings Ltd (VR.N) and rejected its offer as "inferior and highly conditional."

Transatlantic also established a poison-pill plan to keep anyone from taking control of the company in the open market. The plan lasts for a year and has a 10 percent ownership threshold.

Transatlantic and Allied World Assurance Co Holdings Ltd (AWH.N) agreed to a friendly all-stock deal in June. A month later, Validus made its cash-and-stock offer. While both bids are at a discount to Transatlantic's stock price, the Validus discount is smaller.

At one point, Transatlantic said Validus's offer could lead to a superior proposal, but the sides were unable to come to terms on a confidentiality agreement and Validus took its offer to shareholders.

Transatlantic said it sued Validus in federal court in Delaware, alleging that it made "false and misleading statements" to shareholders.

Validus called the lawsuit meritless, said the action was expected and said it would pursue its tender offer.

The Transatlantic lawsuit bears similarities to a legal tactic pioneered by Tenet Healthcare Corp in its defeat of hostile bidder Community Health Systems Inc.

Tenet (THC.N) lobbed allegations that Community (CYN.N) was bilking government and private insurers. It wrapped the claims in a federal securities lawsuit, saying that Community was failing to disclose material information in its tender offering documents.

Transatlantic alleges that Validus fails to adequately disclose risks to its financing and is misleading investors about merger savings.

There is another connection between the cases -- Adam Offenhartz of the law firm Gibson Dunn & Crutcher LLP represented Tenet and is representing Transatlantic.

Shares of Validus fell 0.3 percent to $27.25 and shares of Transatlantic fell 0.6 percent to $51.49 in afternoon trading. Allied World rose 0.7 percent to $55.51.

At those prices, Allied's bid was worth $3.04 billion and Validus's was worth $3.14 billion.

RALLYING SHAREHOLDERS

Still unknown are the intentions of Davis Selected Advisers, Transatlantic's largest investor with a stake of nearly 24 percent and 9.9 percent voting control. In two SEC filings, Davis has said it may oppose the Allied bid. It has not commented on the Validus proposal.

Allied World and Validus have been canvassing shareholders to drum up support for their deals.

Allied World has been making the case that its deal with Transatlantic would save money and create a company with a better risk profile, two sources said.

It says Transatlantic shareholders also will get a specialty insurance business with their deal, while the company would double down on reinsurance in the rival offer.

Validus shares fell 10 percent after the bid was announced, reducing the 14 percent premium it was offering. Transatlantic shares are trading about 2 percent above the Validus bid, which is worth around 3 percent more than the Allied deal.

Validus has argued that its offer is still worth more than Allied World's, a third source said.

It is also raising questions about the industrial logic of the rival deal, arguing that Allied World's specialty insurance business competes with many reinsurance clients of Transatlantic, according to the source.

Validus is digging in for a long battle, as it did two years ago when it won a months-long bidding war for Bermuda reinsurance rival IPC, the source said.

"In the IPC transaction they took it all the way down to the bitter end, and they are prepared to do the same thing here," the source said. (Reporting by Ben Berkowitz and Paritosh Bansal in New York and Tom Hals in Wilmington, Delaware. Editing by Gerald E. McCormick, Derek Caney, Bernard Orr and Robert MacMillan)

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