Opportunity knocks. With markets in turmoil, it is no surprise that Berkshire Hathaway’s Warren Buffett should spot value – and seize it. Transatlantic Holdings, a re-insurer that once belonged to AIG, is already the target of two offers. The first, originally worth $3.2-billion (U.S.), was a friendly all-share offer in June from Allied World Assurance, its former sibling under AIG’s wing; the second, a mix of cash and shares initially worth $3.5-billion from Bermuda-based Validus Holdings, in July. The equity portion of both has been hammered. Cue an all-cash bid from Mr Buffett’s National Indemnity. He usually dislikes auctions or hostile bids, but who can fault his opportunism?
Berkshire Hathaway has the firepower. Although its portfolio has shed value in the latest sell-off and its shares have lost ground, it had $47-billion of cash at the end of June. It is helped by Transatlantic’s falling share price, unsupported by sagging Allied World and Validus bids.
The timing is faultless. Disasters are usually followed by robust rate rises as re-insurers repair balance sheets. This time, as the sector digests claims from Japan and Australasia, will be no different. Consolidation drives up rates.
Transatlantic’s board must weigh the investor upside and synergies touted by Allied World and Validus against hard cash from National Indemnity. Before Allied World’s offer (and Transatlantic’s half-year results), the target’s shares traded at $44. Its end-June book value was $68. National Indemnity’s offer, at a 23-per-cent discount, partly closes that gap. On Friday prices, it is at an 18-per-cent premium to Transatlantic’s undisturbed price, compared to Allied World’s 0.48 per cent and Validus’s 5.9 per cent.
As equity storms rage, Berkshire is betting investors will prefer cash. It may not do hostile bids or auctions, but it still does opportunistic knockout bids at fat discounts to book value. And so it should.
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