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NEW YORK—The fight to take over reinsurer Transatlantic Holdings Inc. looked set to turn into a slugfest last week as Berkshire Hathaway entered the battle with a $3.2 billion offer.
That marked the third offer in two months for the former reinsurance affiliate of American International Group Inc. and provoked reactions from other participants in the bidding war, including legal action.
Volatility in the stock market last week added a new dimension to the battle as the valuation of the two previous bids, which were largely stock-based, swung wildly.
And Transatlantic may hold out for a higher offer than any of those already on the table, some observers say.
The attempt to take over New York-based Transatlantic began in June when Transatlantic announced a stock-for-stock merger with Zug-Switzerland-based Allied World Assurance Co. Holding A.G. A month later, Bermuda-based reinsurer Validus Holdings Ltd. transformed the orderly merger into a bidding war with a stock-and-cash bid.
Last week's offer of $52 a share by Omaha, Neb.-based Berskhire's main reinsurance unit, National Indemnity Co., stirred things up further.
“Evidently Berkshire sees this as an attractive price for a well-established reinsurer,” said Bruce Ballentine, an analyst in New York at Moody's Investor Service. “The pattern of Berkshire is to buy assets that seem undervalued.”
The deal would make Warren Buffett's reinsurance units already significant position in the U.S. reinsurance market even more robust. National Indemnity is the largest U.S. reinsurer, based on net written premiums, according to the Reinsurance Assn. of America's 2010 report on reinsurers' financials. Transatlantic is the second largest and Berkshire's other reinsurance unit, General Re Group, is ranked as the eighth largest U.S. reinsurer by the RAA (see box).
“You have three sound companies looking to buy another sound company,” said John Andre, vp at A.M. Best Co. Inc. “We're comfortable with all the parties involved.”
Berkshire's bid came after the rival offers had diminished amid the stock market swoon during recent weeks. Allied World's all-stock merger agreement with Transatlantic sank to $46.66 by market close on Friday, from its original $50.76 per share value based on closing prices before the deal's announcement June 12. And Validus' cash-and-stock unsolicited offer plunged to $46.72 from $55.95 per share as of announcement July 12.
“Companies that have cash on their balance sheets tend to swoop in during difficult markets, and that's what Berkshire was trying to do,” said Michael Yoshikami, CEO and founder of the Walnut Creek, Calif.-based investment adviser YCMNET Advisors Inc. who has invested in Berkshire, but isn't involved in any of the other companies in the bidding war.
“And in all likelihood, that's why Transatlantic will probably hold out for a higher price. They know the stock is down because of the market” and probably feel their company is worth more, he said.
The move by Berkshire triggered moves by Validus and Transatlantic. Validus filed suit against Transatlantic in Delaware Chancery Court in Wilmington, seeking removal of an agreement between Allied World and Transatlantic that the reinsurer said had prevented it from entering deal talks.
In a letter to Transatlantic filed with the U.S. Securities and Exchange Commission on Thursday, Validus Chairman and CEO Ed Noonan complained about New York-based Transatlantic's “apparent lack of commitment to finding a mutually acceptable way that our companies can exchange nonpublic information.”
He also said Validus would deliver a one-way confidentiality agreement that would permit Transatlantic to examine Validus' non-public information, but would not require Transatlantic to share its information with Validus.
On Friday, Transatlantic said that it had entered a confidentiality agreement with National Indemnity and would start discussions with the reinsurer.
Validus and Allied World say their bids provide Transatlantic stockholders with the opportunity to participate in a combined company that would have the potential to improve its value in the future.
Allied World had offered to give Transatlantic shareholders a 58% stake in the combined entity, while Validus had offered 48% ownership. Berkshire has not yet announced all the details about its bid.
“I'd rather have ($52 per share) today that I can deploy in a distressed marketplace, than ownership in a future entity that should do well,” said Gregory W. Locraft, a Boston-based executive director covering property/casualty insurers at the New York financial services firm Morgan Stanley. He added that if Allied World and Validus are willing to raise their bids, those could be good transactions as well, but the Transatlantic board elected to engage in merger discussions in a distressed marketplace.
It's not the first time Berkshire has joined into a bidding war involving Validus. After Validus made an unsolicited bid for IPC Holdings Ltd. in 2009, Berkshire reportedly made an all-cash offer for the Bermudian property catastrophe reinsurer. But Validus ended up completing the deal in July 2009 for $1.65 billion cash and stock.
Transatlantic did not return messages seeking a comment. Berkshire and Allied World declined comment.