Farmers Shifts Stance, Agrees to Talk With Suitor
Farmers Group, an insurance holding company based in Los Angeles, reversed field Monday and said it would be willing after all to discuss a 3-month-old takeover effort by Batus Inc., the U.S. arm of a British conglomerate.
In a letter to the parent BAT Industries in London, Farmers Chairman and Chief Executive Leo E. Denlea Jr. said his company is willing to talk about Batus’ current $63-a-share all-cash offer. Last week, Farmers had suggested in a proxy statement to shareholders that it might consider accepting a buyout offer at a higher price. That was the first indication that Farmers might be willing to do business with Batus.
Denlea’s letter, released Monday, asked BAT to elaborate on two hints last week that it might raise the $4.5-billion offer. He also offered to hand over confidential information already made available to other, unidentified suitors if Batus signed an agreement to keep such information secret.
Denlea set a deadline of 9 a.m. today, New York time, for Batus to agree to negotiations and sign the promise of confidentiality. In a statement, Batus did not immediately agree but did note that it has called for direct talks before and said that it was studying the terms of the confidentiality agreement.
In a separate filing with the Securities and Exchange Commission, Farmers also revealed that while it is now willing to talk to BAT, it continues to negotiate a possible purchase of the company by management.
Decision Praised
Investors reacted to Monday’s developments by bidding up Farmers Group shares by $2 to a close of $64.875, an indication they expect a higher offer from Batus. Farmers ranks as the nation’s third-largest home and auto insurer.
Four industry analysts praised Farmers’ decision to talk to BAT and predicted that the cigarettes and department store chain, formerly known as British American Tobacco, will now succeed in its takeover bid.
“It’s about time,” that Farmers spoke to BAT, said Michael Morrissey, chairman of Firemark Insurance Research, an independent research firm in Morristown, N.J. “The day of not being for sale at any cost, those days are past.”
Farmers’ refusal for three months even to consider Batus’ advances was not “very sensible,” said John H. Snyder, who follows the insurance industry for Smith Barney, Harris Upham & Co. in New York. “You can’t just ignore it and say that we have nothing to discuss.”
He added: “Farmers Group was susceptible. It will not remain independent in our opinion. A final, takeout offer would be $65 to $70 a share.”
Analysts Skeptical
A Los Angeles analyst agreed that Farmers probably would be acquired soon. “The most likely scenario is a deal with Batus. So far what has happened in the situation is that Batus has not gone away, and the second thing of significance is that no one else has come to the party,” said Richard Kayne, a longtime insurance industry analyst and now president of Kayne, Anderson & Co., a Los Angeles investment management company.
Analysts were skeptical that Farmers Group management could buy the company in a so-called leveraged buyout, or LBO. They doubted that top company executives could borrow the nearly $5 billion required to top Batus’ current bid, and questioned whether regulators would allow an insurance company to carry so much debt.
“An LBO would likely take on too much debt and would probably raise more problems with regulators than Batus would,” Snyder said. The company’s resistance to Batus, “just smells of entrenchment, of management wanting to keep their jobs,” he said.
Farmers may be playing up the possibility of a leveraged buyout in a gambit to make Batus offer more money, said Herbert E. Goodfriend, an insurance industry analyst with Prudential-Bache Securities in New York. Other U.S. insurance companies do not have the cash or the management structures to swallow Farmers, and foreign insurance companies do not seem to have been interested in bidding against BAT, he said. “I believe it was used as kind of a cosmetic tool to show they had alternatives.”
Two companies rumored on Wall Street as possible financiers of a leveraged buyout--Kohlberg Kravis Roberts & Co. in San Francisco and Gibbons Green van Amerongen in Los Angeles--did not return a reporter’s phone calls on Monday. Farmers’ Denlea also declined comment through a spokeswoman.
