Validus Goes Hostile on $3.2 Billion Bid for Transatlantic

July 25, 2011

Bermuda-based reinsurer Validus Holdings took its $3.2 billion offer to buy Transatlantic Holdings, Inc. directly to shareholders on Monday, after rejecting its rival’s conditions for merger talks.

It was the second time in two years that Validus launched a hostile bid for a reinsurer that had already agreed a deal with someone else. In the previous case, Validus ultimately prevailed in its efforts to buy underwriter IPC.

Validus said it was unable to start discussions with Transatlantic because of a “standstill” provision that would have prevented it from pursuing its bid without the approval of Transatlantic’s board.

“Clearly, this is not a condition that we can accept, and your position causes us to question whether your overture of last week was genuine,” Validus CEO Ed Noonan told Transatlantic’s board in a letter.

Last week, Transatlantic reaffirmed its deal with Alllied World Holdings, which is worth $3.04 billion at Monday morning’s share prices. But Transatlantic said it was possible Validus’ offer could lead to a superior proposal and that it would approach Validus to open talks.

Transatlantic accepted Allied World’s bid on June 12. Validus made its unsolicited cash-and-stock bid on July 12.

At least two large holders of Transatlantic stock, representing more than a quarter of its shares, have expressed concerns about the Allied bid ,and have suggested they may push Transatlantic to seek a better deal.

Transatlantic said Monday it still considered Allied’s bid superior and it recommended shareholders not take any action yet on the Validus offer.

Validus’ exchange offer for Transatlantic’s stock will end on Sept. 30, unless extended.

Shares in all three companies fell at Monday’s open, with Transatlantic down 0.8 percent to $52.07, Validus off 0.9 percent to $27.44 and Allied World down 0.4 percent to $55.43. The broader Dow Jones industrial average was down 0.9 percent in early trading.

At those levels, both the Allied World bid and the Validus proposal represent a discount to Transatlantic’s shares. The Validus bid remains about 4 percent higher than the Allied offer, however.

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Should Validus succeed, the newly combined company would be the world’s sixth-largest reinsurer.

Reinsurers sell insurance to insurers for their exposures, letting them offset some of their risk and freeing them up to write more policies.

Roughly three-quarters of Validus’ business would be exposed to short-term risks like hurricanes, and roughly one-quarter to longer-lasting perils like medical malpractice and workers’ compensation, what the industry calls “long-tail” risk.

Some analysts have said that long-tail exposure was a problem for Validus, part of the reason Validus shares have fallen more than 11 percent since the company made its bid.

Something similar happened in 2009, when Validus stepped in to snatch up IPC from its deal with Max Capital. Shares fell sharply once Validus made its offer and did not recover to pre-bid levels for nearly five months.

Analysts and investors have been saying that the Bermudan reinsurance market was ripe for consolidation, with too many companies holding too much capital and competing for too little business.

Yet most agree that the Transatlantic bidding war is a unique case and not a spark for further deal-making, as valuations across the island remain too depressed to make acquisitions attractive.

(reporting by Ben Berkowitz in New York and Jochelle Mendonca in Bangalore; editing by Joyjeet Das)

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