Reinsurer Validus Holdings Ltd (VR.N) said it will buy Flagstone Reinsurance Holdings FSR.N for about $600 million in cash and stock to boost its property reinsurance business.
The deal comes after Validus unsuccessfully tried to buy another reinsurer Transatlantic Holdings Inc YTRAS.UL last year. Transatlantic's board, which repeatedly rebuffed Validus, accepted a $3.4 billion stock-and-cash offer from property and casualty insurer Alleghany Corp (Y.N) in November.
Validus will pay $8.43 per Flagstone share — a 19 percent premium to the stock's Wednesday close. Flagstone shareholders will receive $2 in cash and 0.1935 Validus shares for each share they tender in the offering.
Flagstone's stock was up 19 percent at $8.39 in late-morning trading on the New York Stock Exchange. Validus shares were marginally up at $33.38.
Validus said it expected the deal to immediately add to its earnings.
The company will assume $250.2 million of Flagstone hybrid junior subordinated deferrable interest debentures, Validus said on a conference call with analysts.
The deal has a break-up fee of $24.2 million, it said.
Flagstone had a diluted book value of $11.52 per share when it reported second-quarter results earlier this month.
Insurers like SeaBright Holdings Inc SBX.N and Transatlantic have sold for less than book value as the industry evaluates future profitability in the light of low investment returns and increasing competition.
"The price seems very reasonable, possibly enough to attract other bids, and Validus has proven to be a successful acquirer that should benefit from increasing scale and diversification," Stifel Nicolaus analyst Meyer Shields wrote in a note to clients.
Bermuda-based Validus said Lightyear Capital and Trilantic Capital Partners, which together own more than a fifth of Flagstone, have agreed to the deal.
Hedge fund firm Elliott Associates, run by Paul Singer, owned about 8.7 percent of the reinsurer as of June 30. Elliott, which sometimes takes activist stances in its portfolio companies, held 6,158,490 shares at the end of the second quarter, according to a filing with the U.S. Securities and Exchange Commission.
Elliott declined to comment.
Analyst Shields added that he was not worried that Validus was using its own modestly discounted shares to pay for the transaction. Validus is currently trading at a 10 percent discount to book value, according to Thomson Reuters StarMine.
"The transaction ... concludes a lengthy and extensive process in which the Board carefully considered a broad range of strategic alternatives," Flagstone Chief Executive David Brown said in a statement.
Flagstone has been selling non-core businesses to focus on property and casualty reinsurance. The reinsurer sold its Lloyd's operations and Island Heritage unit in April.
Deutsche Bank advised Validus, while Evercore Partners advised Flagstone.
(Additional reporting by Katya Wachtel in New York; Editing by Joyjeet Das, Jeffrey Benkoe and Maju Samuel)