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.