Farmers Takes Off the Gloves in Battling Suitor : Insurer Raises Cigarette Issue, Involvement in S. Africa and Nicaragua
Desperate to escape a $4.3-billion hostile takeover bid by Batus Inc. and its British parent, once staid and reticent Farmers Group of Los Angeles has declared global war.
In the past two weeks, Farmers has sought to link its unwanted suitor to everything from racism to lung cancer. Using information collected by private investigators and the Los Angeles law firm of Gibson, Dunn & Crutcher, the giant insurance holding company has documented and publicized the role of London-based BAT Industries as the world’s largest private tobacco company.
It has also criticized BAT’s operations in South Africa and Nicaragua. A two-volume briefing paper released Friday afternoon by Farmers titled “Issues of Corporate Responsibility: BAT Industries’ South African Activities” weighs no less than 11 pounds.
The barrage represents a desperate but perhaps futile effort by Farmers to stay independent, said John H. Snyder, an insurance industry analyst with Smith Barney, Harris Upham & Co. in New York. "(It’s) surprising for such grown men to be acting that way, but that’s business. I guess that’s what happens when you’re trying to stay independent. . . . It’s going to take awhile, but (Batus) will prevail.”
Farmers’ retention of an investigation firm is not unusual, he added. “What’s another $100,000 if you can get . . . anything that might tarnish an acquiring party and tip (a state) insurance commissioner a little ways” toward disapproving the deal.
Struggles for corporate control are usually bitter affairs, but some unwritten restraints still apply because rival boards are offering dollars and cents to profit-minded money managers and takeover specialists. But the gloves are off in the current slugfest as Farmers, the nation’s third-largest home and auto insurer, seeks to persuade nine state insurance regulatory commissioners that Batus is unfit or otherwise lacks the integrity to own an insurance company and should be barred from acquiring Farmers.
“It’s a public trust, and public trusts get a lot more scrutiny,” Snyder said.
Farmers most publicized attack has concerned its own nonsmoking discounts on homeowner, life and auto insurance policies. It asks what may become of such discounts if the company is gobbled up by BAT. Last year BAT--formerly British-American Tobacco Co.--sold more than $15 billion worth of cigarettes and other tobacco products. Louisville, Ky.-based Batus owns Brown & Williamson Tobacco Corp., which makes Barclay, Kool, Raleigh and Viceroy cigarettes.
“We see a certain inconsistency between the world’s largest tobacco manufacturer acquiring the insurance company in the United States that is in the forefront of providing lower insurance rates to nonsmokers,” said Charles L. Schultz, Farmers’ senior vice president for finance.
Potential Threat Cited
“We’ve taken a firm position over the years that smoking is injurious to health,” and contributes to house fires, he added. “We’re somewhat concerned as to whether that philosophy would be allowed to continue in the event of a major tobacco company being allowed to call the shots.”
Farmers has also charged that potential wrongful death or injury lawsuits brought by smokers against BAT might someday bankrupt the giant company. No one has yet won a penny from tobacco companies with such suits, but some experts have said that if any of the plaintiffs now in court are successful, a flood of litigation could follow.
In response, Batus spokesman Gene Russell said both of BAT’s current insurance subsidiaries in Great Britain offer nonsmoking discounts and that one of them had introduced the discounts since its acquisition by BAT several years ago. Two U.S. tobacco makers already own a total of three insurance companies, two of which offer nonsmoker discounts, he said.
If Batus is successful in the takeover battle, Russell added, “We would anticipate that Farmers would continue to offer such policies as long as they were constructive to their business.”
Only one state insurance department, Arizona’s, has held hearings thus far on the Farmers acquisition. In closing statements last Thursday, Assistant Arizona Atty. Gen. Michael R. Schaffert said on behalf of the department’s staff that, “There has just been no evidence showing that Batus would cease the nonsmoker discounts. At most it has been shown that those discounts might be curtailed.”
Schaffert’s recommendation that the acquisition be approved is not binding on the hearing officer or Arizona Director of Insurance Vern R. Pierson. And Arizona’s rules for rejecting acquisitions are narrower than other states, Schaffert cautioned.
The Arizona hearing officer also held that tobacco liability lawsuits were irrelevant.
Farmers has also hammered at BAT’s involvement in racially segregated South Africa, distributing lists of BAT’s alleged controlling stakes in 44 companies there. “BAT has a substantial and I believe growing presence in South Africa,” said Schultz, arguing that regulatory authorities considering the acquisition should look at recent efforts by states and municipalities to sell their stock in companies with South African operations.
When a reporter asked for further documentation, he received from Gibson, Dunn & Crutcher a two-volume, 59-section tome titled, “Issues of Corporate Responsibility: BAT. Industries’ South African Activities.”
BAT does have roughly 3,000 to 4,000 South African employees in various subsidiaries, Russell said. But the subsidiaries amount to 1% or less of the company’s total assets, sales and employees, he said, and the company’s chairman has publicly denounced South Africa’s racial practices.
Moreover, he added, Farmers has not sold its own stock in companies with South African investments. “We find it ironic that Farmers should raise this issue.”
Schultz said 80% of Farmers’ investment portfolio is in bonds and only 20% in stocks, and only a quarter of the stock is in companies involved in South Africa. The company’s investment committee has agreed on a plan to invest only in companies such as Abbott Laboratories that comply with the Sullivan Principles, which give minimum conditions for the treatment by U.S. multinationals of nonwhite South African employees, he said.
Not in Violation
Finally, Farmers has called BAT’s role in Nicaragua to the attention of several state regulatory agencies. BAT owns 60% of Tabacalera Nicaraguense, which processes all of the country’s tobacco harvest and sells most of its cigarettes. The subsidiary is the largest or one of the largest taxpayers in Nicaragua because the country’s Sandinista government has traditionally raised about a third of its revenue from taxes on such products as cigarettes and soft drinks.
BAT has been in Nicaragua since 1952. Batus spokesman Wilson Wyatt said the company should not be judged because power had changed since then. BAT’s U.S. subsidiary--which is the entity seeking to buy Farmers for $63 per share--has no involvement with Tabacalera, and so is not in violation of President Reagan’s May, 1985, ban on U.S. trade with Nicaragua, BAT lawyers have told the California Department of Insurance.
Lawyers are among the biggest beneficiaries of the takeover struggle. Schaffert, a 1985 graduate of UCLA law school, brought one assistant to the Arizona hearings last week. Batus and Farmers each sent six to eight New York and Los Angeles lawyers, together with platoons of assistants, he said. “It was quite a show. The hearing room a lot of the time was standing room only.”