Enstar Group Ltd. has made a 100% cash offer to purchase Watford Holdings Ltd.for $31.00 per ordinary share, which amounts to $620 million.
The Enstar offer is higher than another offer received recently from Arch Capital Group and a group of private equity firms for a reported $26 per share, or $500 million. (Although there have been press reports about the bid, Arch has never confirmed publicly that it has made a bid for Watford).
“We would be pleased to engage with Watford and its board to help provide a solution and are pleased to provide you with our non-binding indicative proposal for the acquisition of 100% of the ordinary share capital of Watford,” said Enstar in a letter to Watford’s board of directors on Sept. 30, which is now part of a filing with the Securities and Exchange Commission.
Currently a 9.1% shareholder in Watford, Enstar noted that Watford’s board of directors have hired Morgan Stanley to help evaluate strategic options for the company.
Enstar said it recently raised its stake in Watford because it believes “the current share price undervalues the true economic value of Watford.” (Enstar raised its stake in Watford during the third quarter).
The $31.00 per share purchase price represents a premium to current market price of 35.1%, said Enstar.
The acquiring entity will be a wholly owned direct or indirect subsidiary of Enstar Group Ltd., added Enstar, which is a publicly traded company with $21.3 billion in total assets.
Activist investor Capital Returns Management LLC in May called for Watford to be sold or put into runoff, complaining about “consistently poor operating and stock performance” in comparison with its peers in the industry.
“We continue to believe that Watford should not be an independent public company. Watford’s heavily discounted public market valuation reflects its abhorrent governance and management structure,” said Ronald D. Bobman, president of New York-based Capital Returns Management, in an emailed statement on Oct. 5.
“The market has correctly concluded that Watford is being run by and for the benefit of Arch and HPS [Investment Partners], and not by its independent board nor for its public shareholders,” he continued. Watford’s underwriting operations are managed exclusively by subsidiaries of Arch Capital Group Ltd., which also has a $100 million equity investment in Watford. Further, a significant majority of Watford Re’s investments are managed by HPS Investment Partners.
Arch and Watford representatives were not available for comment.
Sources explained that the unusual relationship between Watford, HPS and Arch makes it difficult for other buyers to acquire and operate Watford due to the long-term underwriting and investment contracts.
“I am encouraged by Enstar’s $31 per share proposal for Watford, but this price (like the public market price) is also a significant discount to the value of Watford’s extremely attractive book, in part because Enstar would be subjected to the same, disadvantageous Arch and HPS management contracts that weigh on the public shareholders today,” Bobman said.
“Arch and HPS should agree to amend those contracts and clear Enstar to pay a full and fair price, or Arch should step up and pay Watford’s shareholders fair value. Arch, after all, trades at a premium to tangible book, so an acquisition of Watford even at $38 per share, would create a huge windfall for Arch shareholders,” he affirmed.
“I call upon Arch and HPS to waive their management contracts or for Arch to step up and agree to pay 85% or 90% of Watford’s tangible book value. We estimate tangible book value of approximately $43 per share as of Sept. 30, 2020, creating a win for both Watford shareholders (who have so far been wronged at every turn) and Arch’s own shareholders,” Bobman went on to say.
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