Bloomberg News

Transatlantic Bids Need $1 Billion Windfall to Succeed: Real M&A

October 14, 2011

Oct. 14 (Bloomberg) -- Transatlantic Holdings Inc., the reinsurer circled by five suitors this year including Berkshire Hathaway Inc., needs to demand a $1 billion windfall to ensure shareholders aren’t stuck with the industry’s cheapest deal.

Buyers must offer at least $3.9 billion to value Transatlantic at 92 percent of its net assets, the lowest multiple in a reinsurance or property and casualty insurance takeover in the last five years, according to data compiled by Bloomberg. That would be $1.15 billion more than the company’s market value in June before any bidders emerged and a 23 percent premium to yesterday’s closing price. It’s also 11 percent higher than the top proposal so far, from Validus Holdings Ltd.

Allied World Assurance Co. Holdings AG and a unit of Warren Buffett’s Berkshire each tried and failed to combine with Transatlantic this year as reinsurers on average traded as much as 31 percent below their book value after a magnitude-9 earthquake and subsequent tsunami hit Japan in March. Now, Validus and at least two more bidders are pursuing the New York- based company as its chief executive officer prepares to step down at the end of 2011.

“As the Transatlantic saga unfolds, it’s very difficult for a management team to want to sell itself under book value,” Keith Walsh, an analyst for Citigroup Inc. in New York, said in a telephone interview. “I can’t see this selling for book value with what the returns are in the group and where the group is trading, but we need to see better offers. I don’t think we’ve seen anyone’s best offer yet.”

Six Continents

Transatlantic and Validus declined through representatives to comment on the bidding process.

Transatlantic gained 0.8 percent to $51.28 today in New York, while Validus rose 1.6 percent to $25.89.

With operations on six continents, Transatlantic sells reinsurance, or coverage for primary carriers to protect against the costliest property and casualty claims. The reinsurer was previously majority owned by bailed-out insurer American International Group Inc., which sold its stake in public offerings in 2009 and 2010.

Takeover proposals for Transatlantic emerged after the stock declined 15 percent this year through June 10. Bidders are pursuing a company that was trading at 0.68 times book value when it closed at $44.01 on June 10, before a now-terminated merger agreement with Allied World.

Transatlantic ended yesterday at $50.86, giving it a market capitalization of almost $3.2 billion and valuing the company at 0.75 times book value. The stock last traded above the value of its assets minus liabilities more than three years ago.

‘Acceptable’ Bids

Transatlantic needs a bid of at least 0.92 times its book value of about $67.76 a share as of June to avoid being the cheapest takeover of a publicly traded reinsurer or property and casualty insurer greater than $500 million since 2006, according to data compiled by Bloomberg. That would equate to an offer for Transatlantic’s equity of about $62.34 a share, a 23 percent premium to yesterday’s closing price and 42 percent higher than the price before any suitors were announced.

“They need to find something that’s acceptable to both their board as well as their shareholders,” said Citigroup’s Walsh. “This has more legs to play out.”

The lowest price-to-book multiple in the property and casualty insurance industry in the last five years was AIG’s purchase of the 45 percent of Osaka, Japan-based Fuji Fire & Marine Insurance Co. it didn’t already own for 46.4 billion yen ($557 million), an 8 percent discount to book value, data compiled by Bloomberg show. AIG, the New York-based insurer majority owned by the U.S. government, agreed to the deal in February before Japan was struck by its strongest earthquake on record. The acquisition closed in July.

Bidding War

Bermuda-based Validus won a bidding war for property reinsurer IPC Holdings Ltd. with a stock-and-cash offer of about $1.7 billion. That valued the Bermuda-based company at about 0.94 times book value when it was announced in March 2009, the cheapest reinsurance deal on record, data compiled by Bloomberg show. Berkshire had made a cash offer for IPC, two people familiar with the matter said at the time. IPC put itself up for auction after a planned merger with Max Capital Group Ltd. was rejected by shareholders.

Transatlantic mostly writes casualty reinsurance, which means the company has longer-term liabilities than a reinsurer that covers primarily property like IPC, Michael Paisan, an analyst at Stifel Nicolaus & Co., said in a phone interview. Bidders would want to pay less than book value to acquire any casualty reinsurer because reserves for long-term liabilities may be inadequate, he said.

Reserve Risk

“There’s always reserve risk,” Paisan said. “Given that element of risk, you really don’t want to pay more than book value for it.”

Shares of reinsurers have dropped since disaster claims including Japan’s earthquake and tsunami cut capital. The Bloomberg Industries index for companies principally focused on property and casualty reinsurance had fallen 15 percent this year through yesterday, compared with a 4.3 percent decline for the Standard & Poor’s 500 Index.

The industry’s discount to book value “makes dealmaking quite difficult because you’ve lost your buyer and seller,” W. Marston Becker, CEO of reinsurer Alterra Capital Holdings Ltd., said at the third annual Reactions Magazine conference in New York last month. “What you’re left with is these very awkward, stock-for-stock, book-for-book transactions. Those are tough.”

‘Puzzling’ Deal

Bidding for Transatlantic kicked off June 12 when Zug, Switzerland-based Allied World announced a merger agreement in which Allied World would exchange 0.88 share for each Transatlantic share. The all-stock transaction, challenged by a competing offer from Validus, was opposed by Transatlantic’s largest shareholder, Davis Selected Advisers LP. The deal was terminated on Sept. 16.

Tom Shrager, one of four managing directors at Tweedy Browne Co., an investor in Transatlantic, also objected to the deal and said it was “puzzling” that the company would want to sell itself at such a “big discount” to book value.

Transatlantic said CEO Robert Orlich would retire when it announced the deal with Allied World. After the deal fell apart, the company said he’ll step down at the end of the year and be replaced by Chief Operating Officer Michael Sapnar.

Before it was terminated, one of Transatlantic’s financial advisers, Moelis & Co., signed off on the agreement with Allied World, saying it was in line with book multiples of comparable deals, including the takeover of IPC and Max Capital’s purchase of closely held Harbor Point Ltd. that formed Alterra.

‘Opening Act’

Transatlantic then rejected a $3.25 billion takeover offer from National Indemnity Co., a unit of Omaha, Nebraska-based Berkshire, saying the proposal was a “substantial discount to book value” and wouldn’t “deliver fair value to stockholders,” according to a Sept. 19 statement. The all-cash bid was for $52 a share, 23 percent less than Transatlantic’s book value, data compiled by Bloomberg show.

“I don’t fault them for rejecting at all,” Peter Sorrentino, a senior money manager at Huntington Asset Advisors in Cincinnati, which oversees $14.6 billion, said in a phone interview. “Given where the share price has been hovering, the market confirms that it may be just kind of the opening act in this drama.”

Now Validus is left to vie for control with two other groups. Validus is offering 1.5564 shares and $8 in a cash dividend for each Transatlantic share, or $55.95 a share when it was disclosed July 12, data compiled by Bloomberg show. That was the equivalent of a 17 percent discount to book value.

‘Battle Royale’

As of yesterday, the proposal was worth $47.66 a share with the dividend after Validus’ shares declined 17 percent. Validus signed a confidentiality agreement with Transatlantic Sept. 23 that placed a limited standstill on its bid until Oct. 31.

Transatlantic then disclosed Sept. 26 and Oct. 11 that it entered into confidentiality agreements with two additional, unidentified parties.

Private equity fund manager Christopher Flowers may be part of the group including Enstar Group Ltd. and C.V. Starr & Co. that’s in talks with Transatlantic, the Insurance Insider reported Oct. 11. The publication said last month that Joseph Brandon, the former CEO of Berkshire’s General Re, is also leading a group of investors.

Flowers’ assistant Brianne Mai and a representative for C.V. Starr declined to comment on bidding for Transatlantic. Richard Harris, a spokesman for Enstar, and Brandon didn’t respond to telephone messages requesting comment.

“It’s going to be a continued battle royale,” said Paisan at Stifel Nicolaus. “Transatlantic is doing anything they possibly can to get a bid that’s higher than what’s out there. They’re trying desperately to find somebody to make a reasonable offer.”

--Editors: Sarah Rabil, Daniel Hauck.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Noah Buhayar in New York at nbuhayar@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Dan Kraut at dkraut2@bloomberg.net.


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