State Rejects Farmers Bid, Citing Government Stakes in Batus’ Parent
In an unexpected decision, California Insurance Commissioner Roxani M. Gillespie disapproved on Friday a $4.35-billion hostile takeover bid by Batus Inc. for Farmers Group, a giant Los Angeles insurance holding company.
Gillespie invoked a law stating that companies selling insurance in California cannot be owned or controlled by government entities from outside the state. Including government employee pension funds and nationalized industries, such out-of-state and foreign entities own more than 10% of the stock of BAT Industries, the London-based parent of Batus.
“The Department of Insurance has always interpreted this section strictly,” Gillespie said in an interview. The department turns down about one proposed acquisition a year on these grounds, she said, although she could not immediately recall the names of any such cases.
“This is a traditional department decision, and we have done it in the way we have made all decisions,” Gillespie said, stressing that the move was not influenced by intensive political lobbying and a well-organized public relations campaign by Farmers.
Some insurance department staff members have read the California law as banning takeovers by companies with even a single share in the hands of out-of-state government entities, Gillespie said. But in a 1984 case, the department’s general counsel determined that a company that was 2% owned by out-of-state government interests could take over a California insurance company, she said.
No single government entity owns more than 2% of BAT’s stock, according to a report from a department panel that held hearings into the matter in late May. But the evidence did not establish whether pension plans and other governmental shareholders ever act in concert to control BAT’s business decisions, Gillespie said. “There just was not enough evidence. . . . We simply did not have enough facts to make specific determinations on the specific pension plans.”
Batus denounced the decision as unconstitutional and said it would take legal action to overturn it. The Louisville, Ky.-based firm said 300 insurance companies doing business in California failed to meet the department’s interpretation of the law--including Farmers Group itself, Allstate, Transamerica, Chubb, Cigna, CNA, Firemen’s Fund, Geico and Travelers.
“This is a significant setback to Batus’ unwanted, hostile takeover attempt, and we feel strongly Batus will face difficulty in other states,” Farmers Chairman Leo E. Denlea Jr. said in a statement.
California law does not specify an appeals process within the Insurance Department, nor have the commissioner’s decisions on out-of-state ownership been challenged before, Gillespie said. So any legal action by Batus will probably take place in the courts and could pave new legal ground, she said. “It’s an excellent opportunity to have a court take a look at this section of the California code.”
Political pressure did not hurt in persuading Gillespie to nix the deal, said Joseph R. Cerrell, a high-powered Los Angeles political lobbyist hired by Farmers in mid-April. “I think it was helpful.”
Cerrell claims credit for arranging denunciations of the deal by four state Assembly members, three state senators and the city councils of Los Angeles, Oxnard and West Hollywood. Political pressure, he said, “was all part of the whole (public relations) package, the whole operation.”
Help From Washington
Batus failed to lobby key California politicians early or effectively, he said. “It was too little, too late, by the time they got around to it.”
Cerrell’s partner in Washington arranged denunciations of the Batus bid by Sen. Alan Cranston (D-Calif.) and eight members of Congress. Farmers also gave $2,000 to Americans for Nonsmokers’ Rights, a Berkeley-based lobbying association, to pay for the printing and mailing of flyers to 6,500 association members across California. The flyers urged members to write to Gillespie and Gov. George Deukmejian to object to the deal. Members have sent about 600 letters, association director Mark Pertschuk said Thursday.
Gillespie and Deukmejian together have been receiving about 100 to 150 letters a day opposing the deal, an Insurance Department spokeswoman said earlier this month.
A spokeswoman for Deukmejian’s chief of staff, Michael Frost, said early Friday afternoon that representatives of both Farmers and Batus had approached the governor’s office to ask if it would become involved in the decision. Both sides were told that the governor would not attempt to influence Gillespie in any way, the spokeswoman said. Gillespie also said she had heard nothing whatever from the governor’s office.
Under state law, Gillespie could turn down the proposed takeover if she found that it substantially reduced California insurance industry competition; threatened Farmers’ financial stability or the interests of its policyholders; was unfair to policyholders; put Farmers in the hands of a company with insufficient experience, integrity, or competence, or left Farmers no longer able to meet the standards for holding its licenses to write insurance.
The commissioner found that Batus met all of the requirements except the out-of-state and foreign ownership provision. Gillespie said BAT’s involvement in South Africa and possible vulnerability to tobacco product liability lawsuits do not preclude it from buying Farmers.
Stock Price Rises
Meanwhile, Batus announced Friday morning that it had extended the deadline of its $63-a-share offer to July 14 from midnight Thursday.
Holders of 19.3 million Farmers shares, or 28.2% of the outstanding stock, had tendered their shares as of Thursday, Batus said.
Gillespie’s decision was announced after the close of stock trading. Farmers shares closed Friday at $62, up 62.5 cents, in over-the-counter trading, after rising 87.5 cents Thursday.
“I think there are just a bunch of people who are making a bet on this ruling,” a takeover speculator who has accumulated a large block of Farmers stock said Friday morning.
Some takeover specialists, or arbitragers, who were unwilling to tie up a lot of money and attention investing in Farmers during the early regulatory hearings, began buying the stock this week, the speculator said. “It’s one of the few deals out there, and that’s why arbs have pretty big positions. . . . It’s frustrating from the point of view of trading because you have to watch it every day.”
