British Firm Bids $4 Billion to Acquire Farmers Group

By DENISE GELLENE

Jan. 14, 1988 12 AM PT

Times Staff Writer

B.A.T. Industries, the giant British tobacco conglomerate that owns Marshall Field and Saks Fifth Avenue among other U.S. companies, Wednesday offered $4.2 billion for Farmers Group, a major fire and casualty insurer in California and the West.

The offer by B.A.T. (originally British-American Tobacco) is the most dramatic evidence yet that U.S. firms are now seen as a bargain by foreign companies, because of the precipitous drop in the dollar’s value. In the last year, British firms spent a whopping $29.2 billion to buy U.S. companies, more than double the year before.

Los Angeles-based Farmers, which ranks as the nation’s third-largest home and auto insurer, said it will study the $60-a-share bid but made no other comment. The offer was proposed in a letter to Farmers Chairman and Chief Executive Leo E. Denlea Jr. The letter gives Farmers until Jan. 22 to respond.

Farmers Group shares soared in over-the-counter trading Wednesday but closed well below the price of B.A.T.’s offer. Farmers shares closed at $54.25, up $11.25 and an all-time high for the stock.

On Wall Street, investment analysts said B.A.T.’s offer seemed somewhat generous, as Farmers shares have traded recently in the mid-$40s.

“I don’t see why shareholders won’t grab $60,” said John H. Snyder, an insurance industry analyst with Smith Barney, Harris Upham & Co. in New York.

Farmers Wins Praise

If another bidder were to surface, B.A.T.--which has the equivalent of about $1.8 billion in cash in hand--could easily afford to increase its offer, analysts said. They added that B.A.T. also could borrow huge sums of cash to finance the deal without difficulty. The conglomerate has debt of $2.16 billion, a relatively low amount given B.A.T’s size. In 1986, B.A.T. had revenue of $30 billion and income of $1.2 billion.

B.A.T. said the acquisition would be financed through cash and borrowings.

The offer was not a complete surprise. B.A.T. already owns two insurance companies in Britain, which have grown considerably under its ownership, and the firm previously said it wants to make a similar acquisition in the United States.

Now the state’s second-largest writer of home and car insurance, Farmers began in 1928 as a small insurer that offered reduced rates to farmers. The company now writes policies in 26 states, mostly in the West and Midwest. It also owns three group life and health insurance companies. In 1986, it had earnings of $213.47 million on revenue of $1.12 billion.

Snyder, the Smith Barney insurance industry analyst, praised Farmers as “one of the most respected and best run (firms) in the industry.”

Investment analysts who follow the insurance industry said Farmers has been successful in the often precarious property and casualty insurance business. Unlike many of its competitors, Farmers shares the risk with so-called “insurance exchanges” that are owned by the policyholders. These exchanges collect premiums and pay insurance claims while Farmers collects fees for managing the exchanges.

As a result, Farmers “doesn’t suffer from the ups and downs” of the property and casualty insurance business, says Frederick Sandburg, an insurance industry analyst with Legg Mason Wood Walker in New York.

Farmers has not done as well in its group life and health insurance business, where it bears the risk directly because it doesn’t operate exchanges for those insurance lines. Last year, one of Farmers’ subsidiaries, Ohio State Life, withdrew from the unprofitable group accident and health insurance business. Analysts said B.A.T. was probably attracted to Farmers because of the company’s stable earnings flow.

In his letter to Denlea, B.A.T. Chairman Patrick Sheehy said he “had the greatest respect for you and your management team.” Sheehy said he intends to keep Farmers management and headquarters in place if the companies merge. B.A.T. is known for its “hands-off” attitude toward its subsidiaries.

B.A.T. made the offer through Batus, its U.S. subsidiary based in Louisville, Ky. In 1986, Batus underwent a major restructuring, shedding the Gimbels department store chain and other retail businesses that together accounted for $1.5 billion in yearly sales.

At the time, Batus said it was turning its attention to high growth businesses with strong market positions. Besides Marshall Field’s and Saks, Batus also owns Brown & Williamson Tobacco, maker of Kool and Lucky Strike cigarettes. In 1986, Batus had income of $393.6 million on revenue of $5.5 billion. Analysts said B.A.T. was no doubt aided in its bid for Farmers by the sharp decline in the dollar over the last year.

The slide in the dollar’s value has dramatically decreased the amount foreign firms, which deal in strong yen, pounds or marks, have to pay for U.S. companies. B.A.T.’s offer for Farmers is worth 2.33 billion British pounds. If B.A.T. had made its offer a year ago, it would have paid the equivalent of 2.84 billion British pounds.

B.A.T.’s offer for Farmers is just the most recent, and perhaps most striking, example of how cheap dollars have sparked a corporate invasion from abroad. Last year, oil giant British Petroleum Co. spent $7.56 billion to buy the remaining shares of Cleveland-based Standard Oil, in which it already held controlling interest. Another British firm, Blue Arrow, spent $1.3 billion to buy the Manpower temporary employment firm. In another deal involving a British firm, Grand Metropolitan spent $1.2 billion to buy Heublein Wines & Spirits Co.

In a study released Wednesday, J. P. Mervis & Co., a British financial adviser, said British firms spent $29.2 billion to buy 314 U.S. companies last year, compared to $13.9 billion for 229 firms in 1986.

TOP DEALS OF 1987

The British* were involved in three of the biggest takeovers last year. Values are in millions.

*1) BP acquires remaining 45% of Standard Oil $7,995

2) Borg-Warner Holdings acquires Borg-Warner 4,175

3) Owens-Illinois Holdings acquires Owens-Illinois 3,729

4) JT Acquisition acquires Southland 3,712

*5) Unilever Plc acquires Chesebrough-Pond’s 3,096

6) National Amusements acquires Viacom 2,938

7) Hoechst acquires Celanese 2,886

*8) British government sells American

Depositary Shares in BP 2,550

9) Burlington Holdings acquires Burlington Industries 2,498