Reinsurers Allied World Assurance Co Holdings Ltd and Transatlantic Holdings Inc called off their merger on Friday in the face of overwhelming opposition, and Transatlantic indicated it might remain independent despite two higher offers on the table.
Five days after telling shareholders to accept Allied World's all-stock offer of about $47 per share, Transatlantic said it would be a disservice to them to accept a $52-a-share cash offer from Warren Buffett's Berkshire Hathaway.
A person familiar with the situation said the difference between the two was a potential upside with the Allied deal -- shareholders had the chance to benefit from future gains. However, Berkshire would buy them out at a discount and left no potential for returns down the road.
Transatlantic was controlled by insurer AIG until 2009, when AIG reduced its stake in an effort to raise capital following a U.S. government bailout.
The New York-based company has been attractive to competitors because of its depressed valuation. It also offers reinsurers, with heavy exposure to short-term risks like natural disasters, more exposure to longer-term lines of business like medical malpractice and workers' compensation.
The failure of the Allied deal had been expected for days, after three proxy advisory firms said Transatlantic shareholders should reject the offer. Earlier this week, an Allied executive told a Barclays Capital conference the deal was unlikely to succeed.
Allied World said in a statement it would receive a $35 million break-up fee and $13.3 million in expenses from Transatlantic. Transatlantic would owe Allied another $66.7 million if it entered into another deal within a year.
Allied World's all-stock offer was worth $2.94 billion, or $47.05 a share, at Thursday's closing prices and represented a roughly 5 percent discount to Transatlantic's share price. Shareholders were due to vote on the agreement on Tuesday.
Transatlantic sent a letter to stockholders Friday, noting "it will continue to entertain and evaluate any serious proposal or opportunity that offers its stockholders full and fair value."
But it said the Berkshire offer "would not deliver fair value to stockholders," and that Berkshire had been unwilling as recently as last Friday to discuss raising its bid.
Transatlantic has also rejected a cash-and-stock offer from Validus Holdings, which took its bid directly to shareholders in late July. Since then, the companies have sued each other and Validus has filed to remove and replace Transatlantic's board.
In response to the end of the Allied deal, Validus said it welcomed "the opportunity to enter into discussions (with Transatlantic) without any restrictive preconditions."
On the New York Stock Exchange, Transatlantic fell 3 percent, Allied rose 3.3 percent and Validus fell 2.6 percent early Friday afternoon.
At Thursday's closing prices, the Validus deal is worth $48.26 a share, or $3.02 billion. The Berkshire offer is worth $3.25 billion.
But both put Transatlantic at a substantial discount to book value -- 0.71 times from Validus and 0.77 times from Berkshire. The property and casualty insurance and reinsurance sector has a median value of 0.84 times book, according to Thomson Reuters data.
In the interim, Transatlantic said it will increase its stock buyback program to $600 million, with a commitment to buy back half of that this year.
Davis Selected Advisors, Transatlantic's largest shareholder, endorsed both moves.
"Davis Advisors applauds Transatlantic's efforts to create value for shareholders with an intelligent capital management plan while at the same time remaining open to other strategic alternatives," it said in the company's statement.
Transatlantic also said Chief Executive Robert Orlich would retire as planned and that chief operating officer Michael Sapnar would become CEO as of January 1, 2012.
Transatlantic also released preliminary results for the third quarter on Friday, saying it expected to report earnings per share of 85 cents to $1.15 for the quarter. That is less than the lowest of seven analysts' estimates for earnings compiled by Thomson Reuters I/B/E/S.
(Reporting by Ben Berkowitz; Editing by Gerald E. McCormick, Derek Caney, Dave Zimmerman, Gunna Dickson and Richard Chang)