U.S. property and casualty insurer Alleghany Corp (Y.N) said on Monday it would buy reinsurer Transatlantic Holdings Inc TRH.N for $3.4 billion in cash and stock -- though a sharp drop in Alleghany shares meant a separate, hostile bid for Transatlantic was at least temporarily more valuable.
The Transatlantic saga has dragged on for months, since it first struck a deal with peer Allied World Assurance Co Holdings Ltd (AWH.N) in June. That merger fell apart in September amid opposition from Transatlantic's largest shareholder and in the face of two unsolicited bids that were worth more money.
The new deal with Alleghany is worth far more than the Allied World bid. But the spoiler in the Allied deal, which may spoil the Alleghany offer as well, is reinsurer Validus Holdings Ltd (VR.N).
Because Alleghany fell sharply and Validus rose in midday trading Monday, Validus's hostile cash-and-stock offer was worth about $2 a share more than the Alleghany bid. One analyst said Validus could even pursue a higher spread than that.
"I think Validus will increase their offer, they have historically been aggressive in terms of pursuing acquisitions," Stifel Nicolaus analyst Meyer Shields told Reuters. Shields was referring to Validus's 2009 hostile (and ultimately successful) pursuit of peer IPC.
Validus first made its offer for Transatlantic in July, a bid which quickly became hostile, with dueling lawsuits and sharp accusations on both sides. The sides eventually opened friendly talks, but they fell apart in October and Validus is now trying to replace Transatlantic's board.
Transatlantic's main insurance lines, like medical malpractice and workers' compensation, are attractive to rivals more exposed to shorter-term risks such as hurricanes.
"We are of a certain size and scale and have been looking for ways to improve our position in the industry," Alleghany Chief Executive Weston Hicks said in an interview. "If you don't grow with the exposures and the customers you wind up become increasingly marginalized over time."
PREMIUM TO BOOK
Transatlantic shares rose 1.2 percent to $55.09 in early afternoon trading. Validus shares rose 2.1 percent to $29.24. Alleghany shares fell 7.1 percent to $292.02.
At those prices, the Validus offer was worth $58.26 per share and the Alleghany offer was worth $56.56 per share.
Each deal offers a premium to both Transatlantic's book value and the average book value for the sector -- a sharp reversal from the summer, when Transatlantic's suitors were seeking to buy the company at a discount.
"It's a fair price given the alternatives," said Ken Charles Feinberg, a portfolio manager at Davis Selected Advisers, Transatlantic's largest shareholder. The firm, which holds 23.2 percent of Transatlantic, said Monday in a regulatory filing that it would back the Alleghany deal.
But, at the same time, it left the door open to a higher offer, should one emerge.
"I think Validus was a very attractive offer as well. We think very highly of the management team of Validus," Feinberg said in an interview. "If there's another alternative or a better deal that gets surfaced, we have a fiduciary duty to vote our shares in the best interest in of our shareholders."
But Feinberg said it was unlikely such an offer would emerge, given the work Transatlantic has already done in looking at alternatives.
He also said it was not fair to judge the competing bids by Monday's share action, since acquirers usually decline on the day they make an offer, and he said he was confident Transatlantic shareholders would ultimately get the roughly $60 a share the Alleghany deal originally offered.
Alleghany also said Joseph Brandon, former chief executive of Berkshire Hathaway Inc's (BRKa.N) reinsurance business General Re, would join the company as chairman of the Transatlantic unit and executive vice president of Alleghany.
"With the size and complexity of the organization we needed to strengthen the management team," Hicks said, describing Brandon as "instrumental" in closing the deal.
Transatlantic's deal with Alleghany will also mean a mini-payday for former suitor Allied World. When their deal was called-off, Transatlantic said it would pay Allied $66.7 million, in addition to break-up fees, if it entered into another deal within a year.
(Additional reporting by Tanya Agrawal in Bangalore; Editing by Gerald E. McCormick and Tim Dobbyn)