Farmers Ends Talks on Possible Management Buyout
Farmers Group announced Monday that its board decided over the weekend to end negotiations for a possible buyout by management. But the board also reaffirmed its opposition to a $63-a-share hostile offer from Batus Inc.
The decision marks a major setback to the Los Angeles insurer’s efforts to wriggle free from the unwanted embrace of Batus, the U.S. arm of London-based BAT Industries. No alternative bidder for Farmers has emerged.
“It looks to me like every day the vise closes a little tighter,” said Michael J. Morrissey, chairman of Firemark Insurance Research, an investment advisory firm in Morristown, N.J. “Not only do I think Batus will win, I think they will win cheap.”
Morrissey explained that while he valued Farmers at more than $70 a share, he doubted that Batus would raise its bid much above $63 because no plausible alternative bidder has emerged. A buyout by management “sounded like a long shot” because, for regulatory and financial reasons, there is no precedent for a successful leveraged buyout of a major insurer, he said.
Talk of a buyout may have been a ploy to make Batus boost its bid, he added. “Batus has been stingy about increasing the price. And you know why: because it’s been going their way.”
The very size of Farmers, which controls $11 billion in assets, has made it tough for the company’s management to find an outside buyer to bid against Batus, Morrissey said. “It sure looks like they’ve come up blank on that.”
As the likelihood of a pitched battle for control of Farmers Group faded, the price of the company’s stock dropped sharply Monday in an otherwise broadly rising market. Shares in Farmers Group closed at $61.75, down $1.375, in moderately heavy over-the-counter trading of 514,600 shares.
Batus has said repeatedly that it may raise its offer “substantially” if given access to Farmers’ confidential business information. But the two adversaries have been unable to compromise on Farmers’ insistence that Batus agree not to buy more of the insurer’s stock in the near future in exchange for the information.
Batus had no official reaction to Farmers’ decision. “Our $63-a-share cash offer is still on the table. As we’ve repeated before, we’d like to negotiate with Farmers under reasonable conditions,” a company spokesman said.
Any leveraged buyout would have faced several regulatory hurdles. In a traditional purchase of a company by management, the executives put up their own modest millions and then borrow huge sums, to be repaid out of the company’s future earnings or by selling some of its divisions.
But regulators do not like to see insurers carrying a lot of debt, lest they run out of money to pay claims from policyholders. California’s criteria for approving acquisitions discourage buyers of an insurance company from paying for the acquisition through asset sales, said Lorraine Johnson, staff counsel for the state Department of Insurance.
The same guidelines limit how much debt can be taken on by the purchaser of an insurance firm and encourage the owners of privately held purchasers to guarantee personally the debt they assume.
A Farmers spokesman said late Monday that regulatory obstacles “were not a consideration” in the company’s decision to end the buyout negotiations, but he declined to elaborate.
