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Berkshire Hathaway Deal for Insurer Alleghany Is Great for Berkshire, Not so Good for Alleghany

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Alleghany is a “mini Berkshire” that operates a large reinsurance unit and a specialty insurance business, but also has businesses like toys, steel fabrication, and funeral products.

Dreamstime


Berkshire Hathaway
’s
agreement to buy insurer


Alleghany

for $11.6 billion looks like an excellent deal for Berkshire, but only a so-so one for Alleghany.


Berkshire Hathaway

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

The takeover price amounts to 1.26 times Alleghany’s year-end 2021 book value of $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 it should be accretive to Berkshire’s earnings, book value, and intrinsic value in a business that Buffett knows well. Berkshire now trades for more than 1.5 times book value, the high end of its range in recent years. after its run-up this year, with the stock up 15% in 2022.

“This a great deal for Berkshire, and mediocre for Alleghany,” says Charles Frischer, a longtime investor in both Berkshire and Alleghany. “It’s accretive to Berkshire’s intrinsic value and Berkshire gets a potential successor to Ajit Jain.”

Alleghany CEO Joe Brandon, 63, is a well-regarded longtime insurance executive. He is familiar to Buffett because Brandon was CEO of Berkshire’s General Re reinsurance unit from 2001 to 2008.

Buffett praised Brandon in the deal press release, saying, “I am particularly delighted that I will once again work together with my longtime friend, Joe Brandon.”

Jain is a Berkshire vice chairman and head of the company’s vast insurance businesses, including reinsurance and the auto insurer Geico. He is 70 and there is no obvious successor to him within Berkshire.

Alleghany shares were up 25% in early trading Monday, to $848.10 a share, a tiny premium to the Berkshire offer, reflecting the possibility of a topping counterbid. Berkshire’s class A stock was up 1.3%, to $519,829 Monday, and is valued at $766 billion.

Alleghany is a Berkshire-like company that was profiled favorably in Barron’s last fall, when its shares traded around $675. It operates a large reinsurance unit, TransRe, and a lucrative specialty business, RSUI. It has also built an attractive group of non-insurance businesses under the Alleghany Capital umbrella, including toys, steel fabrication, and funeral products.

There is a 25-day go-shop period, and it is possible that Alleghany could attract interest from other bidders.

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


Markel

has been acquisitive over the years and could offer a stock transaction that might appeal to Alleghany holders.  

While Berkshire is offering a nice premium to Alleghany’s share price, the price-to-book multiple isn’t high for a company of Alleghany’s quality. Berkshire is paying little more than 11 times projected 2022 earnings. Alleghany’s book value could approach $725 by year-end, meaning that Berkshire is paying an even smaller premium above forward book value.

Brandon told Barron’s in November that investors have “left the reinsurance industry for dead” after years of large catastrophe losses. That investor view was reflected in Alleghany’s low valuation that Buffett astutely 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 picking up a significant investment portfolio of $23 billion that is now mostly invested in bonds.

Frischer, the investor, would have liked to see a Berkshire stock option for Alleghany shareholders, many of whom are longtime investors and may not relish the idea of paying capital-gains taxes. Alleghany attracts a similar tax-averse group of holders as Berkshire.

 Buffett prefers to pay cash for acquisitions, but could have easily structured the deal as 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 of pressure on Berkshire from federal prosecutors on to push him out.

Gen Re at the time was embroiled in a scandal involving a sham reinsurance transaction with American International Group (AIG) that led to the convictions of five former Gen Re and AIG executives. Those convictions were subsequently thrown out on appeal. Brandon cooperated with federal prosecutors and was never charged in the case.

Buffett has been a fan of Brandon, writing in his 2001 annual letter: “Last fall, Charlie (Berkshire vice chairman Charlie Munger) and I read Jack Welch’s terrific book, Jack, Straight from the Gut (get a copy!). In discussing it, we agreed that Joe has many of Jack’s characteristics: He is smart, energetic, hands-on, and expects much of both himself and his organization.”

The Berkshire deal appears to have come about pretty quickly, which is typical for Buffett who tends to make rapid decisions. Berkshire as usual didn’t use an investment banker—reflecting Buffett’s disdain for them. Berkshire initiated the transaction talks, according to a person familiar with the deal. 

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

Buffett has said that Berkshire will not participate in corporate auctions, and it doesn’t appear that Alleghany 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 states.

There is no breakup fee.

Buffett seems to be banking the deal going through.

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

The Kirby family used to have a sizable stake in Alleghany but it’s unclear just how much is now owned by family members. Alleghany’s chairman, Jefferson Kirby, who holds 2.5% of the company, has agreed to vote in favor of the deal.

There is some ironic history to the deal. Alleghany outbid Berkshire for Transatlantic Holdings, now Alleghany’s biggest business, in 2011. And now Berkshire has a deal for the whole company.

The transaction raises some questions. Why did Alleghany agree to sell now? Brandon only became CEO on Dec. 31, with the retirement of longtime Alleghany CEO Weston Hicks. It is unusual for a new CEO to sell out, especially considering that Brandon was waiting in the wings for several years to succeed Hicks.

The property and casualty business is strong with good pricing, and Alleghany has an excellent franchise. Its valuation has been depressed by volatility in the reinsurance business and weather-related losses in recent years

“Why would the Kirby family do such a deal with such a small premium?” Frischer says. “Their businesses at Alleghany Capital are pretty good and are certainly worth more than 126% of book.”

Write to Andrew Bary at andrew.bary@barrons.com

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