TRH - Transatlantic Holdings

[farnamstreet]

 

Can anyone give an example of where Berkshire "raised" a bid? I couldn't think of any...

[Rabbitisrich]

Has BRK ever retired an active offer? I can't recall of an instance.

 

No, but this is the first time they have made a sort of hostile offer.  If BRK pulled their offer, as PE groups sometimes do as gamesmanship, that would not enhance their reputation, something that is very important to BRK.  :)

 

Wouldn't it be the other way around? Berkshire's negotiation strength partly stems from a tradition of charging for call options.

[Guest Hester]

 

Can anyone give an example of where Berkshire "raised" a bid? I couldn't think of any...

 

Berkshire upped it's bid for Wesco by a token amount, not in a bidding war or anything though.

Berk doesn't need to be the one upping the bids for the long to make money...

[shalab]

BRK won't raise the bid - it is take it or leave it deal. Same thing happened at CEG.  As far as TRH is concerned, at the moment - there are two bidders, they have to come back to BRK to close it by 12/31 and agree for the break-up fee which they havent done yet.

 

 

[twacowfca]

BRK won't raise the bid - it is take it or leave it deal. Same thing happened at CEG.  As far as TRH is concerned, at the moment - there are two bidders, they have to come back to BRK to close it by 12/31 and agree for the break-up fee which they havent done yet.

 

 

 

I would be very surprised if BRK did not raise their bid not just by a token amount but a lot.

 

First, TRH's CEO and the TRH board say that BRK's current bid is not superior to Allied's  I agree.  BRK's  bid only appears to be better than the other two bids because the share prices of those two companies are temporarily depressed.

 

Second, TRH's CEO says that BRK is likely to raise their bid to a level that is clearly superior.

 

Third, talks between BRK and TRH have already begun after BRK signed the confidentiality agreement drawn up by TRH.

 

:)

 

 

[twacowfca]

The key to understanding that the prospect of a favorable outcome for buyers of TRH shares is not merely good but excellent is the fact that TRH's CEO has been talking to Ajit, and he says that he expects BRK to raise their bid substantially so that it is clearly superior to the other two bids.

 

There are several buckets you can put these deals in as Warren does when he speculates on a deal going through at a higher price than the market price.  Most of these buckets are leaky to some extent.  One of these buckets has no leaks and might be tipped over only by the rare mischance.  This deal has the qualities that indicate it belongs in the leakproof bucket.

 

There's a margin of safety here too.  If none of the three suitors buys TRH for a price that's higher than the current market price, owners of TRH have shares in a good reinsurance company selling for 74% of BV and an even greater discount to IV.  :)

 

 

 

[Guest Hester]

 

I think the beauty of the trade is even if nobody raises the bid you still make 4%. TRH was trading at, above, and slightly below the current price for a full month before the recent market dislocation has happened. The "make 4% if your right and lose 40% if your wrong" nature of merger arbitrage doesn't seem likely here, even if all bids pull out, with a strong likelihood of making a good deal of profit from a bidding war.

[Alekbaylee]

Davis Selected Advisors - the Arizona-based fund that will play a decisive role in the race for Transatlantic Re - has filed with the New York Insurance Department (NYID) to lift voting restrictions on its holding in the US reinsurer, The Insurance Insider understands.

 

To secure its equity holding, which currently stands at 23.7 percent of issued shares, Davis Selected entered into a 1 June 2009 binding agreement that only gives it full voting rights on the first 9.9 percent...

 

http://www.insuranceinsider.com/-1234495/3

[twacowfca]

Davis Selected Advisors - the Arizona-based fund that will play a decisive role in the race for Transatlantic Re - has filed with the New York Insurance Department (NYID) to lift voting restrictions on its holding in the US reinsurer, The Insurance Insider understands.

 

To secure its equity holding, which currently stands at 23.7 percent of issued shares, Davis Selected entered into a 1 June 2009 binding agreement that only gives it full voting rights on the first 9.9 percent...

 

http://www.insuranceinsider.com/-1234495/3

 

Good for them!

 

It gets better and better.  The article says that ISS won't approve any deal that Davis Select Advisors opposes.  Most funds follow ISS's recommendation when they vote to approve or deny an agreement for a merger or acquisition.  The article also references that Davis Select Advisors previously stated that they might contact other parties who might be interested in a deal with TRH.  That was before Warren and Ajit made their initial bid.  :)

[Grenville]

twacowfca,

 

Thanks for all the discussion regarding TRH. I spent the weekend researching the company and it looks like a pretty decent operation trading at a decent discount to book. If Berkshire is truly interested then they'll have to put a higher bid in. TRH has most of their assets in bonds and very little goodwill.

 

Thanks,

grenville

[twacowfca]

twacowfca,

 

Thanks for all the discussion regarding TRH. I spent the weekend researching the company and it looks like a pretty decent operation trading at a decent discount to book. If Berkshire is truly interested then they'll have to put a higher bid in. TRH has most of their assets in bonds and very little goodwill.

 

Thanks,

grenville

 

Yup, I think Q2 BV/SH was $67 and TBV/SH was $65.  :)

[twacowfca]

 

Can anyone give an example of where Berkshire "raised" a bid? I couldn't think of any...

 

Yes, Clayton Homes, I think.  BRK did a private, behind the scenes deal with their CEO and BOD that was clearly the best thing for them, all things considered.  But a hedge fund, that was ticked off at BRK because BRK had run up the price behind the scenes on an earlier, different takeover that they thought was in their pocket, saw that it was payback time.  The hedge fund had no strong interest in Clayton, but they created such a legal mess and delayed the closing of the deal that BRK had to cough a little more money to settle the continuing lawsuits.

 

 

[Guest Hester]

http://www.bloomberg.com/news/2011-08-16/buffett-says-berkshire-offer-to-buy-transatlantic-has-expired.html?cmpid=yhoo

[Alekbaylee]

Don't sell yet - Berkshire, Transatlantic still in talks: source

 

http://www.reuters.com/article/2011/08/16/us-transatlantic-idUSTRE77F3A620110816

 

[twacowfca]

The value of TRH to BRK.  

 

TRH has net loss reserves of about $9B.  Assume that BRK will run off one half  to two thirds of TRH's book to bring their CR down comfortably  into the 90% range.  This leaves something more than $3B to $4B of float after about four years to complete a runoff of most of their long tail book.  Add to this $4.23B in shareholders equity.  Result: > $7.23B to $8.23B as a flat or slowly increasing quasi equity amount for BRK to invest for many years into the future if the float is thought of as an interest free loan.  BRK gets all this for a price of $3.2B, the amount of their expired bid, plus whatever additional amount may be necessary to get the deal done.  :)

 

There are a couple of other interesting aspects here.  The amount of equity needed to support the projected decline in premiums that TRH may write after putting half to two thirds of their business into defacto runoff will be a lot less than now.  This reduction in the surplus needed to support TRH's capacity could be dividended up to the parrent company, and the remaining part of TRH would likely be very profitable as Gen Re now is.  :)

 

There is a collateral benefit to running off most of their business that makes TRH more valuable to BRK than to Allied or Validus.  Removal of  more than two billion dollars in premiums from the market will help the soft market turn for Gen Re and other US Reinsurers.

 

This is the kind of company that BRK likes to buy with lots of long tail reserves, some of which is potentially reproducible no cost  float.   TRH is under the gun from their shareholders.  BRK has a great deal almost in hand.  It would be very surprising if both sides don't keep working until they get it done.

[Rabbitisrich]

Twacowfca, shouldn't that analysis balance against the perceived value of Berkshire's long-term negotiating position? I can't track the quote, but I'm positive that Buffett said something to the effect of "there are no free call options in this world". My guess is that the ongoing discussion does not involve a raised cash price, but rather some mix of equity and cash at a lower upfront level.

[twacowfca]

Twacowfca, shouldn't that analysis balance against the perceived value of Berkshire's long-term negotiating position? I can't track the quote, but I'm positive that Buffett said something to the effect of "there are no free call options in this world". My guess is that the ongoing discussion does not involve a raised cash price, but rather some mix of equity and cash at a lower upfront level.

 

There's no way WEB will give up equity with BRK's shares priced a hair above BV!  BRK's expired cash offer had none of the customary terms such as due diligence or tests of soundness or waranties for reserves.  It was a: We'll give you $52/SH for a pig in a poke. With customary terms BRK should be willing to offer perhaps 10% more.  Also, making a full offer before getting a preacceptance is an invitation for others to bid up the price and for the target to string out the timeframe.  Not a good idea.  BRK was willing to pay almost book value for IPC, a bet the farm catastrophe reinsurer.  I'll be very surprised if this goes for significantly less than book.

[tombgrt]

Tha, I sure would not laugh if he gave equity in return and with all the cash lying around.  ;D

 

It seemed unlikely to me that Buffett would raise his bid given his track record with acquisitions but twacowfca made some very good points. It will be interesting to see how this develops further.

 

Thank you twacowfca and others for the very informative topic, I am learning a lot here!

[twacowfca]

Tha, I sure would not laugh if he gave equity in return and with all the cash lying around.  ;D

 

It seemed unlikely to me that Buffett would raise his bid given his track record with acquisitions but twacowfca made some very good points. It will be interesting to see how this develops further.

 

Thank you twacowfca and others for the very informative topic, I am learning a lot here!

 

It would be wishful thinking were it not for the fact that TRH's CEO issued a statement before agreeing to negotiate with BRK that he thinks it is likely, but not guaranteed, that BRK will substantially raise their offer.  Also, I don't think the Davis family would have urged BRK to make an offer if BRK had been unwilling to pay more than 74% of book.

[twacowfca]

:)

[Grenville]

Tha, I sure would not laugh if he gave equity in return and with all the cash lying around.  ;D

 

It seemed unlikely to me that Buffett would raise his bid given his track record with acquisitions but twacowfca made some very good points. It will be interesting to see how this develops further.

 

Thank you twacowfca and others for the very informative topic, I am learning a lot here!

 

It would be wishful thinking were it not for the fact that TRH's CEO issued a statement before agreeing to negotiate with BRK that he thinks it is likely, but not guaranteed, that BRK will substantially raise their offer.  Also, I don't think the Davis family would have urged BRK to make an offer if BRK had been unwilling to pay more than 74% of book.

 

How do you know that the Davis family specifically approached Berkshire? I know they filed a 13F seeking to look for other strategic buyers. I haven't found any news reports specifically mentioning Berkshire.

 

Thanks.

[twacowfca]

Tha, I sure would not laugh if he gave equity in return and with all the cash lying around.  ;D

 

It seemed unlikely to me that Buffett would raise his bid given his track record with acquisitions but twacowfca made some very good points. It will be interesting to see how this develops further.

 

Thank you twacowfca and others for the very informative topic, I am learning a lot here!

 

It would be wishful thinking were it not for the fact that TRH's CEO issued a statement before agreeing to negotiate with BRK that he thinks it is likely, but not guaranteed, that BRK will substantially raise their offer.  Also, I don't think the Davis family would have urged BRK to make an offer if BRK had been unwilling to pay more than 74% of book.

 

How do you know that the Davis family specifically approached Berkshire? I know they filed a 13F seeking to look for other strategic buyers. I haven't found any news reports specifically mentioning Berkshire.

 

Thanks.

 

That was merely a logical assumption.  Sorry for the overstatement.  No direct knowledge beyond public statements.

[twacowfca]

twa - i read poor charlie almanack where munger talks against open bid and closed bid auctions. This would be an open bid auction - one to avoid. I have gotten good results in open bid auctions before but it wasnt widely publicized. We will see how this goes.

 

This now looks like a defacto closed bid because of the market meltdown.  BRK is about the only possible cash bidder for Transatlantic.  The other two bidders stock tanked, and their bids are way out of the money compared to BRK's expired bid which TRH's CEO says BRK is likely, but not guaranteed, to raise significantly.

 

:)

[Grenville]

Tha, I sure would not laugh if he gave equity in return and with all the cash lying around.  ;D

 

It seemed unlikely to me that Buffett would raise his bid given his track record with acquisitions but twacowfca made some very good points. It will be interesting to see how this develops further.

 

Thank you twacowfca and others for the very informative topic, I am learning a lot here!

 

 

It would be wishful thinking were it not for the fact that TRH's CEO issued a statement before agreeing to negotiate with BRK that he thinks it is likely, but not guaranteed, that BRK will substantially raise their offer.  Also, I don't think the Davis family would have urged BRK to make an offer if BRK had been unwilling to pay more than 74% of book.

 

How do you know that the Davis family specifically approached Berkshire? I know they filed a 13F seeking to look for other strategic buyers. I haven't found any news reports specifically mentioning Berkshire.

 

Thanks.

 

That was merely a logical assumption.  Sorry for the overstatement.   No direct knowledge beyond public statements.

 

Thanks for the followup clarification!

[twacowfca]

The most compelling argument for a successful outcome for holding TRH is the incentive for TRH's management to get a deal done, preferably a solid cash offer rather than a stock deal of uncertain value.

 

TRH senior management is approaching retirement age.  Their CEO and his Number One are within a year or two of retirement.  The structure of incentives to do a deal has the same proportion for other high ups as for the CEO, but the absolute values are less.

 

Mr.Orlich, TRH's CEO, has a large number of options that have not yet vested, and these would be worth very little now if they had already vested because the average strike price is mostly at or above the current market price.  However, if there is a change of control, as there would be with an acquisition, their CEO will receive a cash payment of over $17M in compensation for loss of the unvested options that are now of small value!  Other senior officers and managers will get similar payments of lesser amounts.  Shareholder opposition makes the Allied World deal unlikely to receive the requisite shareholder approval.  Therefore, refusing a reasonable, likely to be improved BRK offer would mean the likely loss of enormous sums by the senior managers!

 

The CEO will also receive his entire retirement package as a lump sum of $5M upon a change of control.  The CEO also owns $25M of TRH stock that would have a market value that would be about 10% to 15% less, based on Allied world's current price or Validus' current price.  However, a 16% improvement in BRK's expired cash offer, for example, would give him a 20% boost in value that could not be taken away by a stock market dive.  :)