CALIFORNIA STUNS FAR-FLUNG EMPIRE OF BAT : After Surprise Ruling Denying Farmers Bid, British Conglomerate Is Down but Not Out
Friday’s surprise decision by California Insurance Commissioner Roxani M. Gillespie to disapprove the $4.35-billion hostile takeover bid by Batus Inc. for Los Angeles insurer Farmers Group leaves the bidder and its London-based parent, BAT Industries, down but not out.
Gillespie floored BAT, one of the world’s largest industrial corporations, by ruling that it was partially owned by government-related entities based outside California, which would violate state insurance law. According to BAT, the largest such shareholders are the retirement funds of three British nationalized industries--National Coal Board Pension (with 1.83% of BAT’s stock), British Railways Pension Fund (1.32%) and Electricity Supply Pension Scheme (1.13%).
Batus and BAT have vowed to sue to reverse Gillespie’s decision, saying hundreds of other insurance companies doing business in California have such “governmental” shareholders. Obtaining permission to do business in Farmers’ home state and biggest market is indispensable, analysts have agreed.
Given BAT’s reputation for doggedness and persistence, the takeover battle for Farmers is not over and is unlikely to end soon.
“When they set their eyes on something, come hell or high water, they’re going to get it,” said Paul Himmelheber, vice president of Himmelheber Research, a stock research firm in Philadelphia.
Patrick Sheehy, chairman of both Batus and BAT, is known for his grit and determination. He served a two-year stint in the British army on graduation from high school, then immediately joined British-American Tobacco (BAT’s predecessor) and went off to fight his way up the corporate ladder through appointments in Nigeria, Ghana, Ethiopia and the West Indies. Tobacco is still the company’s biggest business, generating half of its $2.5 billion in pretax profits last year, with retailing, paper and insurance making up the balance.
Aides said they were not surprised when Sheehy showed up in person at Farmers’ annual meeting May 20. He stood up before a largely hostile crowd of longtime Farmers stockholders and employees to present a resolution calling on Farmers’ board to reconsider its refusal to negotiate with Batus.
Such an audacious maneuver, “is certainly not typical of U.K. management,” said Mark P. Duffy, a tobacco and foods analyst with S. G. Warburg in London.
BAT’s and Batus’ management structure, their track record from other acquisitions, plus testimony and interviews with their top bosses provide a picture of these companies--and of what could be in store for Farmers’ 7,700 employees and 4,700 agents in California if the takeover ultimately succeeds.
Two large British insurance companies bought four years ago have thrived in BAT’s stable, while venerable Saks Fifth Avenue has prospered as part of Louisville, Ky.-based Batus. But four less successful U.S. department store chains and a small U.S. insurance company have also passed into Batus’ hands, only to be ruthlessly dismantled or sold off at a loss of millions of dollars and thousands of jobs.
The rule appears to be that both London and Louisville leave their subsidiaries alone--but only as long as they are making money. For highly profitable Farmers, that indicates few major changes would be ahead--unless it somehow loses its golden touch of the last half-century.
In an extensive interview Thursday, Batus President and Chief Executive Henry F. Frigon elaborated on his company’s goals while heatedly denying Farmers’ recent suggestion in a position paper that Batus irresponsibly wheels and deals in companies and careers.
“If you think of our results for just a minute, it’s preposterous for anyone to think of us as other than a white knight,” he said, using a Wall Street term for a company that rescues targets of hostile takeover bids. The Farmers bid is Batus’ first hostile offer, he pointed out.
Batus sees Farmers as a well-run insurance company with both a strong network of sales agents and the size to achieve growth and greater profitability on its own, Frigon said. Farmers is also big enough to function as an “umbrella” under which Batus will be able to stick any future, as yet undetermined, acquisitions, he said.
No plans have been drafted to revamp Farmers’ management or operations, he added. If Farmers were in trouble, “then you’d need a strong operational plan.” But because Farmers is consistently profitable, “for us to say that we have any specific plans at the moment would really be wrong.”
One widespread assumption among insurance industry analysts about Batus’ motives and goals is wrong or exaggerated, according to Frigon. Many analysts have ventured that Batus most values Farmers’ unusual role as a fee-collecting manager of property and casualty exchanges--as opposed to a direct insurer that assumes the insurance risk itself.
But Frigon said Batus looks at the exchanges and Farmers as essentially one company, and the overall company is subject to the roller-coaster cycles of the property and casualty industry, he said. “We certainly look at it from a consolidated point of view. . . . It wasn’t the gimmick, if you will, that attracted us.”
Analysts generally praise BAT and Batus as well managed, with Sheehy’s slow, steady buying and selling of businesses winning the most plaudits. “He turned one of the larger U.K. companies around. Everyone looked at BAT as a big sleepy dog kind of a deal,” Himmelheber said.
“It’s considered to be a well-run company, particularly in the last few years, when Pat Sheehy has been chairman,” said Nyren Scott-Malden, an analyst with Barclays de Zoete Wedd, the investment banking arm of Barclays Bank in London.
Management Criticized
BAT probably can be taken at its word when it says it will leave Farmers management largely intact and does not envision mass layoffs or bringing in platoons of British managers, Scott-Malden added. BAT is highly decentralized and is unfamiliar with the U.S. insurance market, he said. “In terms of the day-to-day management, it’s left very much up to the operating subsidiaries. . . . The people in charge in Brazil, or the States even, or South Africa, are local people.”
BAT, with $31 billion in annual sales, leaves so much operating control to subsidiaries that its corporate headquarters in London has only 100 employees, a Batus spokesman said. Batus’ headquarters in Louisville has a staff of just 130.
Yet decentralized management may not always work. Farmers charges that on the one hand, lack of tight controls sealed the fate of Eagle Star of America, BAT’s sole previous foray into the U.S. insurance industry. At the same time, Farmers says, the most important decisions are made for BAT by just three men in London and for Batus by two men in Louisville.
Farmers claims that Batus--which in 1986 sold its Kohl’s, Crescent and Frederick & Nelson department store divisions and dismantled the Gimbels department store chain--has not always behaved like a responsible manager and builder of businesses. “The entire strategy of acquire, fatten the chicken and slaughter that Batus has employed in retailing fits in poorly with the approach taken by Farmers” to make longer-term investments, Farmers argued in a recent position paper.
‘A Matter of Time’
Batus Executive Vice President Leonard W. Arentsen evaluated selling the department stores, “without the knowledge or input of the CEOs of the individual chains sold,” Farmers continued, basing its claim on Arentsen’s deposition. “The final divestiture decision was reached by only two individuals, Mr. Arentsen and Mr. Henry Frigon, and was announced to a surprised management upon 24-hours’ notice of a Sunday meeting in New York.”
In response, Frigon replied: “It just is a gross distortion to say all this came as a surprise.” Senior department store managers participated actively in the development of growth and profitability targets, and they knew that the retailing chains were failing to meet these targets, he said.
“You don’t have to hit someone over the head for them to realize,” that the deparment store chains were not performing, he said. “By and large, the majority of these people knew it was a matter of time,” before Batus sold the chains.
Between 70% and 80% of the 25,000 employees at Batus retailing divisions sold in 1986 were rehired by the buyers, Frigon said. Batus took a $120-million loss on the sale. Of the 5,000 or so employees thrown out of work, many were able to take retirement while the rest received generous severance benefits, he said.
Like the department stores sold, insurer Eagle Star of America was an underperformer. It was a small piece of Eagle Star Holdings, a British firm that BAT acquired for $1.4 billion in January, 1984. At the end of 1986, BAT disposed of Eagle Star of America to Odyssey Partners for $34.5 million and later made an unusual agreement that BAT would cover all outstanding policy claims for accidents that occurred before the sale. During its brief ownership, BAT also pumped in $38.8 million to shore up reserves, according to A. M. Best Co., an Oldwick, N.J.-based firm that keeps figures on the insurance industry.
BAT blames the small fiasco on several factors that predated the acquisition. First, Eagle Star of America had started a reinsurance subsidiary in January, 1980, just before property and casualty claims soared while competition kept reinsurance premiums low, a Batus spokesman said. In addition, the company had unwisely continued to reinsure with two troubled firms that went bankrupt and left it with $6 million in losses shortly after BAT took over.
In 1983, Eagle Star of America also launched a plan to open eight branch offices--just as the insurance industry was hitting hard times. And finally, the firm was caught with the rest of the insurance industry by rising claims and stagnant premiums in the mid-1980s.
Inadequate Reserves
Farmers contends that Eagle Star of America sank because of poor management. In an extensive statement to Farmers lawyers, former Eagle Star of America vice president of operations Arnold Mangels charged that financial controls were slipshod and that the potential claims from some policies were systematically underestimated.
BAT should have noticed that inadequate reserves for claims were being set aside, Mangels said. “They couldn’t help but notice it if they did a proper claims auditing job or they had an independent (auditor) come in and look at it. It would hit you like a dead mackerel in the face.” (BAT says it did audit the reserves for claims.)
Martin F. Broughton, BAT’s chief financial officer for Eagle Star Holdings until his promotion to BAT headquarters less than two weeks ago, testified at California Insurance Department hearings in late May that Mangels was bitter because he was not promoted to run Eagle Star of America. But Broughton conceded that if Eagle Star of America had not been sold, BAT would have replaced top management immediately.
BAT’s top management body--the three-member chairman’s policy committee--first suggested that Eagle Star of America be sold, on the grounds that it was not performing well, within 16 months of its acquisition. Eagle Star Holdings initially opposed such a move but agreed five months later.
