A Validus/Transatlantic merger has a number of compelling features in its favour, not to mention Ed Noonan’s legendary determination
Ed Noonan is up to his old tricks again. Having successfully broken up what looked like a done deal between Max Capital and IPC Re in 2009, he is attempting to do the same again with the proposed merger between Transatlantic Holdings and Allied World.
This is not about vanity or oneupmanship, however. There are sound business reasons for the transaction, which may ensure Noonan wins out again.
For Transatlantic, an acquisition by Validus would tick many of the boxes that the Allied World purchase did, but with more attractive terms for shareholders.
The three big attractions of the Allied World deal were access to primary insurance – which diminished at Transatlantic after AIG divested its stake in the firm – a Lloyd’s operation and a greater capital base outside the USA.
Validus also provides all three: the Lloyd’s and insurance facets are provided by Lloyd’s insurer Talbot, which in 2010 accounted for 49% of Validus’s gross written premium. And, as it owns Talbot, Validus has legal entities in the UK and Bermuda.
A compelling proposition
The companies should also be largely complementary. Transatlantic is mainly a US casualty player, while Validus is more short-tail focused. Rates in casualty business are currently depressed, and so merging with a company that has a strong short-tail focus should give Transatlantic a lift. Equally, Transatlantic would provide Validus a good - and timely given recent losses - balance to the catastrophe-focused IPC Re.
Transatlantic would also plug what Noonan sees as a hole in Validus’s book. He has largely avoided US casualty lines, having burned his fingers on this business while at American Re in the late 1990s. US casualty, however, is Transatlantic’s bread and butter.
On top of this, Validus’s $55.95-a-share offer, as well as being more generous than Allied World’s, also has features that are more likely to whet shareholders’ appetites. Shareholders tend to prefer cash, and so Validus’s cash/share hybrid offer is likely to be more compelling than Allied World’s all-stock proposal. And the tax-free element to the share portion of Validus’s offer, compared with Allied World’s fully taxable offer, could be a strong draw.
Validus will also strengthen Transatlantic’s reserves by $500m, which should steady any jitters, if there were any, that Transatlantic’s loss experience from old years deteriorates.
Validus has also been careful to manage shareholder expectations. The firm made a one-off gain of $287.1m when it bought IPC, but said in a conference call that, while the deal would be accretive to Validus’s earnings per share, the purchase gain from the Transatlantic deal would be nowhere close to the levels achieved with IPC after paying the reserve strengthening charge and the $115m break-up fee.
As well as the business logic, there is also Noonan’s determination. He was dogged in his pursuit of IPC Re, and shows every sign of being equally tenacious with Transatlantic. The statement issued by Validus says that Validus is “fully committed” to a Transatlantic transaction, and is willing to do things the hard way and pursue shareholders directly if Transatlantic’s board refuse to play ball.
But, while there is a strong case for a Validus/Transatlantic tie-up, it should be remembered that the Allied World transaction also has its merits, and, as with the IPC saga, a counter-counter bid should not be ruled out.