The spread between two of the dueling offers for reinsurer Transatlantic Holdings virtually disappeared Wednesday amid a fresh market rout, as deal-watchers waited for any sign as to what late entrant Berkshire Hathaway might do next.
As of 12:20 p.m. ET, the gap between Transatlantic’s accepted offer from Allied World and its hostile offer from Validus Holdings was about $70,000 in Allied’s favor. At one point, Validus’s mid-July bid was nearly $400 million better than the Allied offer, which Transatlantic accepted in June.
At the time each was made, the Allied World offer was worth $3.2 billion and the Validus offer was worth $3.5 billion.
Validus has lost more than a fifth of its value over the last month since making its bid, which has narrowed the spread substantially. Both bids remain at a sharp discount to Transatlantic’s share price and book value, though.
On the other hand, the surprise $52-a-share offer from Warren Buffett’s National Indemnity unit still stands at a premium. One analyst following Transatlantic said Berkshire stood a good chance of winning just on that premium alone.
“I look at it and have a hard time seeing how it doesn’t go to Warren at some point,” said Larry Greenberg, an insurance analyst at Janney Capital Markets unit Langen McAlenney.
“It probably comes down to price. We don’t know if Warren’s price was cash, they left that ambiguous. I think for some shareholders that is a consideration in being able to participate in any potential upside, but given the spread between Warren’s offer and what the others suggest at this point, and looking at where Transatlantic is trading, I kind of think it comes down to economics.”
There are many who agree with his logic, though there are just as many who doubt Validus or Allied World will give up without a fight.
Stifel Nicolaus, in a research note Monday, said Berkshire’s entry helped prove the merit of Validus’s bid, and that Validus could easily raise its bid without spending more by cutting the amount it plans to infuse into Transatlantic’s reserves after closing.
NO REACTION YET
Transatlantic said Monday night that it would stick with the Allied bid but that National Indemnity’s offer could lead to a superior proposal — the same language it once used with Validus, before the sides failed to agree on confidentiality terms and Validus went to shareholders.
Berkshire has not given any reaction yet to Transatlantic’s offer to hold confidential talks. Berkshire investors, however, doubt that the company has any interest in a bidding war and have said it is likely being opportunistic with a “take-it-or-leave-it” offer well below book value.
With the values getting close, though, sources close to Allied World are hoping it would lead to shareholders picking their deal over the rivals.
“They are better off doing a transaction than not doing a transaction. ‘I am getting synergies, the benefits of a global non-U.S. domiciled reinsurer, and I am getting my fair share of book value per share split,”‘ a source close to Allied World said, referring to Transatlantic shareholders.
“At the end of the day, between doing no deal or something to that nature, I think they will choose to do something,” the source said.
Validus, on the other hand, said Allied was the wrong long-term choice for a number of reasons, including its growth strategy in the U.S. casualty market.
“We continue to believe that our proposal offers superior value and greater potential for future upside to Transatlantic stockholders,” a Validus spokeswoman said.
Shares in Transatlantic fell 2.5 percent to $49.48, shares in Allied were off 1.1 percent at $52.27 and Validus shares declined 2.2 percent to $24.43. All three outperformed the S&P insurance index , which dropped more than 5 percent.
(Editing by Dave Zimmerman)