Farmers Group Spurns BAT’s Offer to Meet
BAT Industries said Thursday that it is willing to negotiate all terms of its rejected $4.2-billion offer for Farmers Group, but the head of the Los Angeles insurance company said he has no interest in meeting with officials of the huge British conglomerate.
Farmers rejected the $60-per-share bid Wednesday as inadequate and not in the best interests of Farmers and its shareholders. And despite BAT’s hint that it is willing to raise its price, Farmers Chairman and Chief Executive Leo E. Denlea Jr. said his company is determined to go it alone.
Exchange Ties a Concern
“We see no need to meet,” Denlea said in an interview. “We feel that the unique performance that we have generated for our shareholders over the years and the 18% annual rate of return (earned on shareholder investments since 1971) are best continued by remaining independent,” he said.
In particular, Farmers is concerned that a takeover could harm Farmers’ relationship with its insurance exchanges. These exchanges are owned by policyholders and assume most of the risk in the company’s property and casualty business.
For those same reasons, Farmers is not looking for a “white knight” to rescue it in case BAT’s intentions turn hostile, Denlea said.
“Obviously, we are exploring a number of alternatives, but we’re not looking for a white knight at this time,” Denlea said. While he did not disclose alternatives, he did say, “If anyone wants to consider a hostile takeover, we feel we’re well prepared to deal with it.”
Farmers does not have a “poison pill” provision, a common defense against a hostile takeover. The poison pill usually allows company shareholders to buy stock at half price in case of a hostile takeover attempt, making the buyout prohibitively expensive.
Accounting Questioned
Another common device is a stock repurchase program, which boosts the company’s stock price. Farmers already has a stock buyback program under way.
In their discussion of BAT’s offer, Farmers’ directors expressed concerned about questions raised in the British press about accounting practices at Eagle Star, one of BAT’s two insurance operations, Denlea said, adding that it “was not a deciding factor by a long shot.”
Eagle Star uses the novel approach of recognizing as profits the unrealized capital appreciation, averaged over five years, that all insurance companies carry in their investment portfolios, according to reports in the British press. The practice has been controversial because it has greatly aided Eagle Star’s financial results.
A spokesman for Batus, BAT’s U.S. subsidiary, said the company “believes that the current practice of taking (averaged) investment gains directly to profit accurately reflects the underlying value of its investment portfolio. In particular, by giving equivalent treatment to both realized and unrealized gains we ensure that performance is measured and reported on a consistent basis from year to year, avoiding any possibility of artificial manipulation.”
