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Berkshire Hathaway’s Bid for Transatlantic Holdings Now Looks Even Better

August 08, 2011 | About:
gurufocus

gurufocus

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While investors are fleeing the market as the U.S. debt ceiling drama plays out and S&P downgraded the U.S. credit rating, Warren Buffett is at it again. His company Berkshire Hathaway (BRK.A)(BRK.B) made a $52 per share bid to acquire insurer Transatlantic Holdings (TRH), which valued the company at $3.2 billion.

On last Friday (August 5), Warren Buffett’s right-hand man Ajit Jain had a phone conversation with the president and CEO of Transatlantic Holdings, Robert Orlich. He then wrote to Mr. Orlich and made a formal offer of $52 per share to acquire all shares of Transatlantic. He wrote: “…With your stock trading at $45.83, I have to believe that you will find our offer to buy all of Transatlantic shares outstanding at $52.00 per share to be an attractive offer. As such, I am now writing to formally inform you of National Indemnity’s commitment to do so at $52.00 per share under customary terms for a stock purchase agreement of a publicly traded company to be agreed (but not subject to any due diligence review or financing condition of any nature).”

Transatlantic Holdings does not have much time to consider! It has to respond “no later than the close of business today (Aug. 8, 2011)”. As always, Berkshire put itself at a heads I win, tails I also win position: Transatlantic Holdings is responsible for a break-up fee of $75.0 million if the deal does not close by the end of the year.

Transatlantic Holdings issued a press release yesterday saying that its board “will carefully consider and evaluate the proposal from National Indemnity and will inform Transatlantic stockholders of the Board’s position.”

The interesting aspect of this offer is that Transatlantic Holdings is already in a definitive merger agreement with Allied World Assurance Company Holdings, AG (AWH), under which Transatlantic and Allied World would combine in a merger of equals, with stockholders of Transatlantic receiving 0.88 Allied World common shares for each share of Transatlantic common stock.

Separately, Validus Holdings (VR) made a hostile takeover bid for Transatlantic. Validus has proposed to acquire Transatlantic for 1.5564 Validus voting common shares and $8.00 per share in cash.

With its current trading prices, Berkshire’s Offer is about 17% higher than Allied World’s offer, and 13% higher than Validus Holdings’ hostile bid.

TransAtlantic Holdings has a book value of about $65 a share. Berkshire’s offer is 20% lower than its book value.

Why Does Warren Buffett Buy Transatlantic?

Transatlantic has already put itself on sale as it entered a definitive agreement with Allied World. It is not surprising Berkshire would step in and make a cash offer. The recent market decline has certainly helped to make Berkshire’s offer look better, as Allied World’s stock has declined from $64 a share to $52 a share today. This was indicated in Ajit Jain’s letter. He said “I have been watching the screen all morning” before he made the offer. Today both the stocks of Allied World and Validus are traded down. Berkshire’s offer looks even better.

Berkshire reported its quarterly results last Friday. The company now has $43 billion in cash, $9 billion more than six months ago, even as Berkshire bought $4.4 billion of stocks in the last three months. GuruFocus is hosting a quarterly contest for users to guess what stocks Warren Buffett bought.

With so much cash in hand, Warren Buffett and his lieutenants have always been looking for new acquisitions. Transatlantic has what Buffett is looking for in acquisitions.

Circle of Competence

Transatlantic is certainly in the business that Warren Buffett understands and loves. “Transatlantic Holdings Inc. is a leading international reinsurance organization headquartered in New York, with operations on six continents. Its subsidiaries, Transatlantic Reinsurance Company®, Trans Re Zurich Reinsurance Company Ltd. and Putnam Reinsurance Company, offer reinsurance capacity on both a treaty and facultative basis ― structuring programs for a full range of property and casualty products, with an emphasis on specialty risks.”

Proven and Predictable Earnings

Transatlantic has been profitable in each of the last 10 years and has grown its earnings through insurance cycles. As an insurer, the company has grown its book value steadily by about 10% a years on average in the last decade, as shown in the chart below, which is something that Buffett loves.



Transatlantic has had a very stable management team. Its current CEO has been managing the company since 1990, and its CFO has served since 1995. The book value and revenue growth of the business is a proof that the management team has done a fine job in growing the business

Historical Low Valuation

If we look at the historical valuation of Transatlantic, we can see that the business is traded at a historical low in term of price to book ratio and price to sale ratio. Over the past 10 years, the company has almost tripled its revenue and more than doubled its book value, but the stock price is 30% lower than it was in 2001. The market does not like Transatlantic, which is good for Warren Buffett. This is the 10-year valuation chart of Transatlantic.



We are still waiting to see if the board of Transatlantic will accept Berkshire’s offer. If the management wants to partner with a company with one of the best reputations in the insurance industry, this is certainly a no-brainer.

Transatlantic stock is up 6.79% today, even as market lost 6.66% and marked the worst day since the financial crisis. It has a 7% spread from the price Berkshire offered.

About the author:

gurufocus
GuruFocus - Stock Picks and Market Insight of Gurus

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Comments

gurufocus
Gurufocus premium member - 3 years ago
Transatlantic declined Berkshire Offer, waiting for better offer:





Board Determines National Indemnity Proposal Does Not Constitute Superior Proposal

Board Determines National Indemnity Proposal Reasonably Likely to Lead to Superior Proposal

NEW YORK--(BUSINESS WIRE)-- Transatlantic Holdings, Inc. (NYSE: TRH) (“Transatlantic”) today announced that its Board of Directors, after consultation with its independent financial and legal advisors, has determined that the proposal set forth in the letter received on August 5, 2011 from National Indemnity Company (“National Indemnity”), a member of the group of insurance companies of Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B), to acquire all of the outstanding shares of Transatlantic common stock for $52.00 per share does not constitute a Superior Proposal, but is reasonably likely to lead to a Superior Proposal, under the merger agreement that Transatlantic entered into with Allied World Assurance Company Holdings, AG (NYSE: AWH) (“Allied World”) on June 12, 2011 (the “Allied World Merger Agreement”), and that the failure to enter into discussions regarding the National Indemnity proposal would result in a breach of its fiduciary duties under applicable law.

As a result, the Transatlantic Board determined to offer to engage in discussions and to exchange information with National Indemnity. While the Board determined that the National Indemnity proposal is reasonably likely to lead to a Superior Proposal, there can be no assurance that the National Indemnity proposal will result in a Superior Proposal or that any transaction with National Indemnity will result from the National Indemnity proposal or Transatlantic’s discussions with National Indemnity.

Pursuant to the Allied World Merger Agreement, prior to entering into discussions with, or providing information to National Indemnity, Transatlantic must provide Allied World with three business days’ notice (which notice period expires at the end of the day on August 11, 2011) of its intent to furnish information to or enter into discussions with National Indemnity. Transatlantic must also obtain from National Indemnity an executed confidentiality agreement containing terms that are substantially similar, and not less favorable, to Transatlantic, in the aggregate, than those contained in the confidentiality agreement between Transatlantic and Allied World. Transatlantic expects to make such confidentiality agreement available to National Indemnity subsequent to the end of the three business day notice period to Allied World.

As previously announced, Transatlantic entered into the Allied World Merger Agreement, pursuant to which Transatlantic and Allied World would combine in a merger of equals, with stockholders of Transatlantic receiving 0.88 Allied World common shares for each share of Transatlantic common stock (together with cash in lieu of any fractional shares). The Transatlantic Board reaffirms its recommendation of, and its declaration of advisability with respect to, the Allied World Merger Agreement.

Goldman, Sachs & Co. and Moelis & Company LLC are acting as financial advisors and Gibson, Dunn & Crutcher LLP is acting as legal counsel to Transatlantic.

About Transatlantic Holdings, Inc.

Transatlantic Holdings, Inc. is a leading international reinsurance organization headquartered in New York, with operations on six continents. Its subsidiaries, Transatlantic Reinsurance Company®, Trans Re Zurich Reinsurance Company Ltd. and Putnam Reinsurance Company, offer reinsurance capacity on both a treaty and facultative basis ― structuring programs for a full range of property and casualty products, with an emphasis on specialty risks.

Visit – www.transre.com (http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.transre.com&esheet=6823825&lan=en-US&anchor=www.transre.com&index=1&md5=b20d88a52ca0bb803e636ec68c80a9f9) – for additional information about Transatlantic.

Additional Information about the Proposed Merger with Allied World and Where to Find It

Allied World has filed with the Securities and Exchange Commission (“SEC”) a registration statement on Form S-4 that includes a preliminary joint proxy statement of Transatlantic and Allied World that also constitutes a prospectus of Allied World in connection with a proposed merger between Transatlantic and Allied World. This communication is not a substitute for the joint proxy statement/prospectus or any other document that Transatlantic or Allied World may file with the SEC or send to their stockholders in connection with the proposed merger. Investors and security holders are urged to read the registration statement on Form S-4, including the preliminary joint proxy statement/prospectus filed and other relevant documents that will be filed with the SEC (including the definitive joint proxy statement/prospectus), as they become available because they will contain important information about the proposed merger. All documents, when filed, will be available free of charge at the SEC’s website (www.sec.gov (http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.sec.gov&esheet=6823825&lan=en-US&anchor=www.sec.gov&index=2&md5=63d47ead60d97cb8ba2534a31cb32486)). You may also obtain these documents by contacting Transatlantic’s Investor Relations department at Transatlantic Holdings, Inc., 80 Pine Street, New York, New York 10005, or via e-mail at investor_relations@transre.com (investor_relations@transre.com); or by contacting Allied World’s Corporate Secretary, attn.: Wesley D. Dupont, at Allied World Assurance Company Holdings, AG, Lindenstrasse 8, 6340 Baar, Zug, Switzerland, or via e-mail at secretary@awac.com (secretary@awac.com). This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval.

Additional Information About the Validus Exchange Offer

This communication is neither an offer to purchase nor the solicitation of an offer to sell any securities. In response to the exchange offer commenced by Validus, Transatlantic has filed a Solicitation/Recommendation Statement on Schedule 14D-9 with the SEC. Investors and security holders are urged to read the Solicitation/Recommendation Statement on Schedule 14D-9 because it contains important information about the Validus Exchange Offer. All documents, when filed, will be available free of charge at the SEC’s website (www.sec.gov (http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.sec.gov&esheet=6823825&lan=en-US&anchor=www.sec.gov&index=3&md5=4e927a685accea6870db9df4b38be208)). You may also obtain these documents by contacting Transatlantic’s Investor Relations department at Transatlantic Holdings, Inc., 80 Pine Street, New York, New York 10005, or via e-mail at investor_relations@transre.com (investor_relations@transre.com).

Participants in the Solicitation

Transatlantic, Allied World and their respective directors and executive officers may be deemed to be participants in any solicitation of proxies in connection with the proposed merger. Information about Transatlantic’s directors and executive officers is available in Transatlantic’s proxy statement dated April 8, 2011 for its 2011 Annual Meeting of Stockholders and the preliminary joint proxy statement/prospectus on Form S-4/A related to the proposed merger, which was filed by Allied World with the SEC on August 5, 2011. Information about Allied World’s directors and executive officers is available in Allied World’s proxy statement dated March 17, 2011 for its 2011 Annual Meeting of Shareholders and the preliminary joint proxy statement/prospectus on Form S-4/A related to the proposed merger, which was filed with the SEC on August 5, 2011. Additional information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, to the extent applicable, will be contained in the definitive joint proxy statement/prospectus and other relevant materials to be filed with the SEC regarding the merger when they become available. Investors should read the joint proxy statement/prospectus carefully before making any voting or investment decisions.

Cautionary Note Regarding Forward-Looking Statements

This communication contains forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Such statements involve risks and uncertainties, which may cause actual results to differ materially from those set forth in these statements. For example, these forward-looking statements could be affected by the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; the inability to obtain Transatlantic’s or Allied World’s stockholder approval or the failure to satisfy other conditions to completion of the proposed merger with Allied World, including receipt of regulatory approvals; risks that the proposed merger disrupts current plans and operations; risks that the unsolicited Validus exchange offer and/or National Indemnity proposal disrupts current plans and operations, including the proposed merger; the ability to retain key personnel; the ability to recognize the benefits of the proposed merger; the amount of the costs, fees, expenses and charges related to the proposed merger, the Validus exchange offer and the National Indemnity proposal; pricing and policy term trends; increased competition; the impact of acts of terrorism and acts of war; greater frequency or severity of unpredictable catastrophic events; negative rating agency actions; the adequacy of loss reserves; changes in regulations or tax laws; changes in the availability, cost or quality of reinsurance or retrocessional coverage; adverse general economic conditions; and judicial, legislative, political and other governmental developments, as well as management’s response to these factors; and other risks detailed in the “Cautionary Statement Regarding Forward-Looking Information,” “Risk Factors” and other sections of Transatlantic’s Form 10-K and other filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Transatlantic is under no obligation (and expressly disclaims any such obligation) to update or revise any forward-looking statement that may be made from time to time, whether as a result of new information, future developments or otherwise, except as required by law.

Source: Transatlantic Holdings, Inc.







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