BAT Ups Ante, Becomes Hostile in Farmers Bid : Spurned Suitor Sweetens Its Offer to $4.5 Billion; Long Battle Is Predicted
BAT Industries, rebuffed in its “friendly” attempts to acquire Farmers Group, on Thursday launched a $4.5-billion hostile tender offer for the nation’s third-largest home and automobile insurer.
BAT, a British conglomerate with interests in tobacco and retailing, said it decided to take its sweetened $63-a-share offer to shareholders after Los Angeles-based Farmers Group steadfastly refused to discuss an acquisition.
On Jan. 20, Farmers Group rejected BAT’s initial $4.3-billion, or $60-a-share, offer. Farmers Group reiterated its desire to remain independent Thursday but said it would consider BAT’s latest offer.
Analysts who follow the insurance industry said BAT’s new offer was just slightly better than the initial bid. “They are just nickel and diming it,” said Frederick T. Sandburg, an analyst with Legg Walker Wood Mason. He estimated that Farmers Group shares were worth about $70.
Farmers Under Pressure
On Thursday, Farmers shares closed at $62.75, up 75 cents in over-the-counter trading. Analysts said the price indicated that investors expected a higher bid to emerge.
Farmers Group has an enviable record in the often precarious property and casualty insurance industry, resulting from an obsession with cost cutting and an intricate corporate structure that insulates it from risk. In 1987, it earned $268.3 million, up 26% from the year before.
BAT’s new offer puts renewed pressure on Farmers Group, which was said to have discussed a number of options, including a management buyout or a recapitalization.
In addition, Farmers Group seems ready to battle BAT before state insurance regulators, who must approve a takeover. In a statement Thursday, Farmers said: “We can confirm it will take a substantial amount of time for this hostile offer to wend its way through the regulatory process before BAT can ever hope to buy Farmers stock.”
Undaunted, BAT sought regulatory approval Thursday in nine states, including California, to acquire Farmers Group. In California, BAT needs regulatory approval before it can buy more than 10% of Farmers Group shares. Meanwhile, the company disclosed that through Feb. 29 it had purchased 696,000, or about 1% of Farmers Group shares on the open market at prices ranging from $45 to $59.375.
Gene Russell, a spokesman for BAT, acknowledged that the approval process could be lengthy. “It may take several months, maybe more,” he said. BAT, which is making the offer through its U.S. subsidiary, Batus, said the tender offer would probably be extended beyond March 30 if approvals haven’t been received.
As previously reported, BAT has obtained $3.2 billion from bank credit lines and loans to finance the acquisition. BAT also intends to use internal funds. The giant conglomerate earned $980 million before extraordinary items for nine months that ended Sept. 30, 1987.
Despite its hostile offer for Farmers, BAT said it intends to continue efforts to force the insurance company into negotiations. BAT has proposed a shareholder vote that would require Farmers to negotiate.
However, Farmers said it hasn’t decided whether to put the proposed resolution to a vote at its annual meeting May 20. “It’s not clear what our responsibilities are on that yet,” said Thomas Welch, director of investor relations for Farmers.
Batus is being advised by Goldman, Sachs & Co., which according to investment banking sources, brought in Shearson Lehman Hutton to handle the tender offer due to Goldman’s longstanding policy against participating in hostile takeovers.
However, Goldman Sachs stands to benefit handsomely if BAT’s offer is accepted. Batus disclosed Thursday that it agreed to pay Goldman Sachs between $10 million and $12.4 million if Batus successfully acquires 51% of Farmers shares.
Goldman Sachs, in turn, will pay Shearson Lehman $1.75 million for acting as dealer manager in the tender offer.
Farmers is being advised by First Boston and Morgan Stanley, which was brought in after First Boston takeover specialists Bruce Wasserstein and Joseph Perella resigned a month ago.
