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Warren Buffett’s deal for Alleghany is great for Berkshire, So-So for Alleghany

Berkshire Hathaway

insurer purchase agreement


for $11.6 billion seems like a great deal for Berkshire, but only average for Alleghany.

Berkshire Hathaway

(symbol: BRK.A and BR.B) said monday that he would pay $848.02 per share in cash for Alleghany (Y), a 25% premium to Alleghany’s closing stock price of $676.75 on Friday, or a 29% premium to relative to Alleghany’s average share price over the last 30 days.

The redemption price is 1.26 times Alleghany’s 2021 year-end book value, or $675.58.

Alleghany isn’t quite the “elephant-sized acquisition” that Berkshire CEO Warren Buffett has long sought, but it would be his biggest buy since the 2016 deal for Precision Castparts. And that should be accretive to Berkshire’s earnings, book value and intrinsic value in a business Buffett knows well. Berkshire now trades at more than 1.5 times its book value, the high end of its range in recent years. after its rise to prominence this year, with the stock rising 15% in 2022.

“It’s a lot for Berkshire and mediocre for Alleghany,” says Charles Frischer, a longtime investor in both Berkshire and Alleghany. “It contributes to the intrinsic value of Berkshire and Berkshire gets a potential successor to Ajit Jain.”

Alleghany CEO Joe Brandon, 62, is a well-regarded longtime insurance executive. He is familiar to Buffett as Brandon served as CEO of Berkshire’s General Re reinsurance unit from 2001 to 2008.

Buffett praised Brandon in the deal’s press release, saying, “I’m especially excited to be working with my longtime friend Joe Brandon again.”

Jain is vice chairman of Berkshire and responsible for the company’s extensive insurance business, including reinsurance and auto insurer Geico. He is 70 years old and there is no obvious successor for him in Berkshire.

Shares of Alleghany rose 25% in early trading Monday to $848.10 per share, a small premium to Berkshire’s offer, reflecting the possibility of a higher counterbid. Berkshire’s Class A share rose 1.3% to $519,829 on Monday and is valued at $766 billion.

Alleghany is a Berkshire type company that has been favorably profiled in Barrons last fall, when its shares traded around $675. It operates a large reinsurance unit, TransRe, and a lucrative specialist business, RSUI. She has also created an attractive group of non-insurance businesses under the Alleghany Capital umbrella, including toys, steel manufacturing and funeral products.

There is a 25-day shopping period and Alleghany may attract interest from other bidders.

The most logical potential bidder against Berkshire is Markel (MKL), an insurer similar to Alleghany and with a market value of nearly $20 billion.


was acquired over the years and could offer a stock transaction that would appeal to Alleghany holders.

While Berkshire offers a nice premium over Alleghany’s stock price, the price-to-book multiple isn’t high for a Alleghany quality. Berkshire is paying just over 11 times projected earnings for 2022. Alleghany’s book value could approach $725 by the end of the year, meaning Berkshire is paying an even smaller premium above the forward book value.

Brandon said Barrons in November that investors “left the reinsurance industry for dead” after years of large catastrophic losses. This investor view was reflected in Alleghany’s low valuation which Buffett skillfully exploited.

Still, Alleghany has generally traded close to book value in recent years, so some shareholders may view the premium offered by Berkshire as attractive.

Berkshire is also acquiring a large $23 billion investment portfolio that is now mostly invested in bonds.

Frischer, the investor, would have liked to see an option to buy Berkshire stock for Alleghany shareholders, many of whom are long-time investors and may not like the idea of ​​paying tax on stock. capital gains. Alleghany attracts a tax-averse group of holders similar to that of Berkshire.

Buffett prefers to pay cash for acquisitions, but could have easily structured the deal in 75% cash and 25% Berkshire stock to allow Alleghany holders a tax-efficient option.

Brandon has a complicated history with Berkshire. He resigned from Gen Re in April 2008 amid reports pressure on Berkshire from federal prosecutors to get him out.

Gen Re at the time was embroiled in a scandal involving a sham reinsurance transaction with American international group (AIG) which led to the conviction of five former leaders of Gen Re and AIG. These convictions were then thrown On appeal. Brandon cooperated with federal prosecutors and was never charged in this case.

Buffett has been a fan of Brandon, writing in his annual letter 2001“Last fall Charlie (Berkshire Vice President Charlie Munger) and I read Jack Welch’s wonderful book, Jack, straight out of the gut (get a copy!). While discussing it, we agreed that Joe has many characteristics of Jack: he is intelligent, energetic, practical and expects a lot from himself and his organization. »

The deal with Berkshire appears to have been done fairly quickly, which is typical for Buffett who tends to make quick decisions. Berkshire, as usual, did not use an investment banker, reflecting Buffett’s disdain for them. Berkshire initiated the settlement talks, according to a person familiar with the deal.

Brandon bought about $400,000 worth of Alleghany stock on March 4 on the open market and likely wouldn’t have done so had he known of negotiations to sell the company. Alleghany’s chief financial officer, Kerry Jacobs, bought shares on March 7.

Buffett said Berkshire won’t be participating in the corporate auction, and it doesn’t appear Alleghany has held one, given the go-shop period.

“Alleghany has the right to terminate the merger agreement to accept a superior proposal during the go-shop period, subject to the terms and conditions of the merger agreement,” the press release read.

There are no breakage fees.

Buffett appears to be cashing in on the ongoing case.

“Berkshire will be the perfect permanent home for Alleghany, a business I have watched closely for 60 years,” he wrote. “Over 85 years, the Kirby family has created a company that has many similarities to Berkshire Hathaway.”

The Kirby family once held a large stake in Alleghany, but it’s unclear how much is now owned by family members. Alleghany Chairman Jefferson Kirby, who owns 2.5% of the company, agreed to vote in favor of the deal.

There is an ironic story in the case. Alleghany outbid Berkshire for Transatlantic Holdings, now Alleghany’s largest company, in 2011. And now Berkshire has struck a deal for the entire company.

The transaction raises a few questions. Why did Alleghany agree to sell now? Brandon did not become CEO until December 31, with the retirement of longtime Alleghany CEO Weston Hicks. It’s unusual for a new CEO to sell out, especially since Brandon had been waiting in the wings for several years to take over from Hicks.

The P&C business is strong with good prices, and Alleghany has an excellent franchise. Its valuation has been depressed by volatile reinsurance business and weather-related losses in recent years

“Why would the Kirby family make such a big deal with such a small bounty?” Fricher said. “Their businesses at Alleghany Capital are pretty good and definitely worth over 126% of the book.”

Write to Andrew Bary at [email protected]