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Fairfax bid for Allied World seen as boost for both


Fairfax Financial Holdings Ltd.’s bid to acquire New York-based Allied World Assurance Co. Holdings A.G. will benefit both companies, analysts said Monday, while opening the door for competing bids.

The insurers announced on Sunday that Toronto-based Fairfax agreed to buy Allied World Assurance for $4.9 billion in cash and stock. The deal is expected to close in the first half of 2017.

“Allied World boasts a market-leading global property, casualty and specialty insurer and reinsurer with increasing global reach,” Zacks Investment Research said in a note. “The acquisition will thus complement the Toronto-based insurance group’s world-wide presence and diversify its group risk portfolio. On the other hand, Allied World will stand to benefit from Fairfax's expertise in Canada, the U.S. and international insurance and reinsurance markets.”

The Zacks commentary noted that Fairfax has been focused on strategic acquisitions. In October, Fairfax agreed to buy insurance operations from American International Group Inc. in Argentina, Chile, Colombia, Uruguay, Venezuela and Turkey. In July, the company announced its plan to acquire Zurich Insurance Company Ltd.’s South African and Botswana operations. 

“On this morning’s conference call we learned there will be a go-shop provision for (Allied World Assurance), and we expect competing offers to emerge,” Barclays Capital Inc. said in a note, referring to the provision that allows a company to solicit interest from potential buyers for a limited period of time.

While Barclays said the acquisition has a strong probability of being completed, the proposed mix of 81% stock and about 10% cash “will likely be a sticking point with (Allied) investors due to the low proportion of cash.”

The Barclays’ note added that “unless Fairfax meaningfully increases the proportion of cash in the proposed deal, we would expect other buyers for (Allied) to emerge, probably at a similar valuation but likely with more cash being offered.”

Barclays noted that the proposed 2015 merger-of-equals between PartnerRe Ltd. and Axis Capital Holdings Ltd. “was not completed due to Exor’s higher all-cash deal proposal,” referring to the ultimately successful competing bid by Turin, Italy-based Exor S.p.A. PartnerRe agreed to pay Axis Capital a $315 million fee to terminate their agreement.

Greg Hoeg, New York-based vice president of U.S. insurance operations for J.D. Power & Associates, said he expects to see more mergers and acquisitions in the commercial lines firms.

“I think part of that is in anticipation of the fact that the soft market over the next 18 to 24 months will probably end, and we’ll see a firming of price with consolidated businesses like these,” he said. “They have larger market share, and they’ll be able to pick up more market share in part because they’ll have greater spread of product, in part they'll have greater capital ... and they'll have a natural extension from existing businesses.”

Fairfax Chairman and CEO Prem Watsa said in a statement that Allied World “will operate within the Fairfax group on a decentralized basis after closing.”

During a conference call, Mr. Watsa said Fairfax has a policy of not reducing the holding company’s cash for acquisitions. Cash for Fairfax’s insurance companies will be used for investments, Mr. Watsa said, as Fairfax intends “to play offense.” 

Mr. Watsa said the election of Donald Trump as U.S. president “has the strong potential to make the business climate for growth in the United States great again, relative to the rest of the world.” 

Scott Carmilani, Allied World’s chairman, president and CEO, said in a statement that “our shareholders will benefit from Fairfax's tremendous investment capabilities as demonstrated by its superior long-term investment track record.”