Farmers Group Agrees to Batus’ $75-a-Share Bid : $5.2-Billion Deal, Biggest in State’s History, Ends Lengthy and Bitter Battle for L.A. Insurance Firm
Ending nearly nine months of often acrimonious dealings and a week of hard bargaining, Farmers Group finally agreed late Wednesday to be bought by its British-owned suitor, Batus Inc., for $75 a share.
The $5.2-billion acquisition of the Los Angeles-based insurance holding company becomes the biggest in California history. It eclipses General Motors’ 1985 purchase of Hughes Aircraft for $5.1 billion.
Signing of a definitive agreement came nearly two hours after Batus’ self-imposed deadline of 4 p.m. PDT as rumors were rife of a deal with prices ranging up to $80 a share.
The companies still must win approval from their shareholders--which does not seem likely to pose a problem--and also from insurance regulators in the nine states where Farmers’ subsidiaries have their headquarters. So far, Batus has won approval in four states, including California, but lost in three, with two states yet to decide.
But both companies, in a joint statement issued in Los Angeles, predicted that they will have all necessary approvals before the end of the year.
Directors of both Farmers and Batus, which is based in Louisville, Ky., unanimously approved the definitive merger agreement, under which Farmers will become a wholly owned subsidiary of Batus.
An End to Lawsuits
In announcing the $75-per-share price, the companies quickly ended Batus’ previous $63-a-share tender offer and said all shares that have been tendered will be returned to their owners.
The companies also agreed to dissolve all pending litigation and claims against each other, and Farmers will modify its “poison pill” anti-takeover plan so that it will not apply to the deal.
The agreement was announced well after stock markets closed Wednesday. Farmers stock finished the day at $69.25, down 50 cents, with 1.15 million shares changing hands. It was the sixth most-active issue in national over-the-counter trading.
Leo E. Denlea Jr., Farmers’ chairman and chief executive, said Batus had resolved all problems that his company had raised in the regulatory hearings. These included concern that Batus would end discounts for Farmers policyholders who don’t smoke. Batus owns Brown & Williamson Tobacco, the nation’s third-largest cigarette maker, whose brands include Kool, Raleigh and Viceroy. Batus’ parent company, London-based BAT Industries, began life in 1902 as British-American Tobacco.
Chairman Delighted
In addition to meeting these concerns, Denlea added, “the board has determined that this negotiated agreement with Batus is clearly in the interests of Farmers’ shareholders. We firmly believe that Farmers and Batus can work with the insurance regulators to give the assurances necessary to enable this merger to be accomplished to the benefit of all parties.”
Patrick Sheehy, chairman of Batus and BAT Industries, expressed delight at achieving what he called “a friendly transaction.”
“Batus plans to continue with the current structure of Farmers operations,” Sheehy said. “We look forward to working with its successful team of management, employees and agents.”
Batus also agreed to retain Farmers’ current management and to provide its employees with benefits “no less favorable in the aggregate than their current benefits,” according to the companies’ joint statement.
Batus made its first friendly overture to Farmers last September. It was not until Jan. 12, however, that Batus offered to buy Farmers’ nearly 70 million outstanding shares for $60 each--a figure that it boosted to $63 on March 3. Farmers stock had been trading for about $43 a share before the first offer.
Farmers quickly rejected both bids, resolutely refusing even to discuss them. As a determined Batus wooed Farmers’ shareholders, Farmers took to the offensive, urging state insurance regulators to find Batus unsuitable to take over Farmers subsidiaries in the nine states where they are headquartered.
The turning point in the battle came Aug. 9, when Batus boosted its bid to $72 a share and set a deadline of last Friday to complete an agreement. Softening its resistance, Farmers management agreed to discuss the new offer, and talks began Aug. 17. The negotiations continued past Friday’s deadline and through the weekend before Batus extended its deadline to Wednesday at 4 p.m.
Shortly after having sat down with Denlea, Sheehy said in an interview Wednesday evening, he felt that an agreement could be reached.
“We really wanted to get Farmers to the table, he said, “but we never expected to get a definitive agreement by Friday (the first deadline). We were making progress.”
Honoring All Contracts
The negotiations took longer than expected, Sheehy said, because the parties had to work out separate agreements with Farmers’ unique network of insurance “exchanges,” which actually write insurance policies and have their own separate boards of governors.
“We want all the Farmers management and we need all the Farmers management,” Sheehy emphasized in the interview. “We are very pleased that Leo Denlea said he is committed to Farmers . . . and looking forward to working with us. And that goes for his top team. It’s a very successful organization, and the last thing we want to do is leave a sense of insecurity. We’re honoring all their contracts.”
Sheehy said he wants to help Farmers grow but has no immediate strategies for accomplishing that. The company is the nation’s third-largest auto and home insurer and the seventh-largest property-casualty insurer.
“We want continuity,” he said. “They’ve done well, and we’d like to see that record continue. After the merger, we’ll sit down with them and see if we can expand.”
Sheehy also said he expected Farmers’ shareholders to approve the deal, explaining: “I think the shareholders are getting a very good value at $75 a share.”
Batus became interested in acquiring Farmers because of its British parent’s desire to diversify beyond its traditional tobacco business, Sheehy said. “We’re interested because it’s in the financial services area, and it’s in America, and one of our goals is to get into financial services in America.”
Some Approvals Needed
BAT Industries has expanded well beyond its tobacco origins over the past 15 years. Through Batus it has acquired the Marshall Field’s and Saks Fifth Avenue department store chains, Breuners furniture stores and several other regional chains in the Midwest, East and Southeast.
Batus so far has won regulatory approval for the Farmers purchase in California, where a Los Angeles Superior Court ruling overturned the rejection of Insurance Commissioner Roxani M. Gillespie, as well as in Arizona, Illinois and Ohio. Batus lost in Washington, Oregon and Idaho, however, and Texas and Kansas have yet to rule, though a hearing is scheduled for Friday in Topeka, Kan.
Farmers’ attractiveness to Batus appears to lie in its unique structure, which enables it to avoid taking the kinds of financial risks that property-casualty underwriters normally must face. Its insurance exchanges--and not the holding company--actually issue the property, casualty and life insurance policies to individuals and bear the risk of any loss. Farmers’ revenue comes mainly from the fees that it collects for managing the exchanges. These range from 10% to 20% of the premium revenue collected by each exchange.
As Sheehy noted, the negotiations were unusually complex because separate agreements had to be achieved between Batus on the one side and, on the other, Farmers and Farmers Insurance Exchange, Fire Insurance Exchange and Truck Insurance Exchange. Each exchange’s board of governors approved the agreements, the companies said.
GIANT MERGER
Batus Inc.
A subsidiary of London-based BAT Industries, the diversified company earned $466 million in 1987 on sales of $5.8 billion.
Its subsidiaries include Brown & Williamson Tobacco, Appleton Papers, Saks Fifth Avenue, Marshall Field’s and Breuners.
Based in Louisville, Ky., Batus employs 40,000 people nationwide, 3,300 in California.
About 305,000 workers worldwide helped BAT, its parent, earn $1.4 billion in 1987 on sales of $31.1 billion.
Farmers Group Inc.
The insurance firm, based in Los Angeles, earned $268.3 million in 1987 on revenue of $1.1 billion. It employs 15,500.
Farmers has 6,700 stockholders and 68.9 million shares outstanding. Its stock closed at $69.25, down 50 cents, on Wednesday in national over-the-counter trading.
