Beazley’s courtship of Hardy has so far met with little success but other suitors may now come into play

Hardy Underwriting’s rejection of a second offer from fellow Lloyd’s insurer Beazley seems to have poured cold water on prospects for a deal between the two companies. However, there are indications that further bids could be made if Beazley loses patience and walks away.

On 15 November, Beazley revealed that Hardy had rejected an improved offer of £3.30 ($5.24) a share without discussion. Hardy had similarly shunned Beazley’s previous offer of £3 a share on 11 October. Hardy contended that both offers substantially undervalue the firm and that the bids are an opportunistic attempt by Beazley to snag Hardy at a knock-down price.

Hardy’s share price has been trading at low levels since the company suffered heavy catastrophe losses to its property treaty portfolio in the first half of 2010. Its first-half profit fell 90% to £800,000 from £7.8m in the same period of 2009 as a result of losses from the Chilean earthquake and the Melbourne and Perth hailstorms in Australia.

At the time, Hardy chief executive Barbara Merry said her firm had been hit harder by the catastrophes than its peers at Lloyd’s because of its business mix, which is 70% international risks and 30% US risks. Lloyd’s insurers are typically more weighted towards US risks.

Before the first Beazley offer, Hardy’s shares were trading at £2.20 – 0.86 times Hardy’s first-half net tangible assets of £2.57 a share.

Following the initial £3 offer, Beazley chief executive Andrew Horton said that Hardy’s shareholders “gave us the impression that £3 a share was on the low side but they didn’t give us any impression that they didn’t want a deal to happen at all”.

He continued: “On the back of that, our board reviewed it and came back with the price of £3.30. We think the £3.30 is a very good price. It is a 50% premium to the share price prior to our first approach.”

However, some analysts contend that Beazley has misjudged its attempt to buy Hardy. KBW analyst Chris Hitchings described the approach as “ill thought out from the start”, while Panmure Gordon analyst Barrie Cornes argued that Beazley would need to offer £4 a share to attract shareholders’ interests.

Hitchings said it was difficult to see why Hardy shareholders should accept an offer that, while higher than the current share price, is lower than the shares would be if Lloyd’s insurers generally were fairly valued by the market. He added that it was equally hard to see why Beazley’s shareholders would be happy paying a full price for the underwriter when its own shares were undervalued. “That was the problem with the whole issue from the start,” he said.

Beazley and Horton have tried to appeal to shareholders to put pressure on Hardy to do the deal, but analysts believe this is unlikely given shareholders’ concept of Hardy’s valuation.

“The approach was based on the idea that when the offer for Brit was rejected, shareholders phoned up [Brit chief executive] Dane Douetil and said: ‘What do you mean by turning this down? We would be very happy with it’, and assuming the same would happen with Hardy,” Hitchings said. “I think that was a complete misjudgement, Brit and Hardy being at opposite ends of the quality spectrum.”

According to Cornes, Hardy was able to reject the £3.30 so confidently because it had already gauged shareholders’ expectations of an acceptable offer price. “The fact that Hardy hasn’t engaged Beazley in a conversation isn’t really surprising,” he said. “There isn’t an awful lot to discuss if the figure is down at a level where shareholders aren’t interested.”

Equally, Merry has been on record as saying that she believes Hardy is highly valuable and she is unlikely to let it go cheaply – if at all.

Beazley has said that it will walk away from the deal if it is unable to kindle discussions with Hardy over the £3.30-a-share offer. And if analysts’ evaluations are correct, that looks likely to be the case. But that may not be the end of the story.

“There is a good chance there could be other offers for Hardy as a result of it being perceived to be in play,” Cornes said. “I don’t think this is necessarily the end of it.”

There is also a slim chance that Beazley could be tempted to go back on its word and submit a higher offer. While Horton says a deal with Hardy is not necessary for the company to achieve its strategy, he clearly relishes the prospect of linking with the underwriter.

“It would be nice, in that the businesses are highly complementary. They would combine incredibly well because they both have an underwriting culture and the lines of business complement one another. Hardy tends to be more internationally focused and we tend to be US focused. We also have similar track records of always having made money for our capital providers.”

It is clearly a tough one to call. “If you read Beazley’s announcement [of the offer rejection], you would say it is fairly black and white that they have no intention of going higher,” Cornes said, “but we have had this situation before with Apollo, CVC and Brit.” GR

Following the publication of this piece, the Hardy/Beazley affair appeared to reach an impasse. See: Beazley withdraws Hardy offer