Behind the Batus-Farmers Deal : $5.2-Billion Merger Hinged on Chemistry Between Chairmen

One of the biggest deals in the financial services field ever--Wednesday’s $5.2-billion agreement for Farmers Group to be acquired by British-owned Batus Inc.--apparently turned on the success of the first face-to-face meeting between the chairmen of the two companies.

That encounter took place on the afternoon of Aug. 17, after preliminary discussions with financial and legal advisers began defining issues that needed to be settled before a deal could be struck. It was followed by several other meetings between the chairmen in the seven days that followed.

In the end, the rapport achieved by Leo E. Denlea Jr. of Farmers and Patrick Sheehy of Batus resulted in Wednesday evening’s final meeting of the two men at Farmers’ home office in the Mid-Wilshire district in Los Angeles, where they signed a definitive merger agreement. Under it, the insurance holding company will become a wholly owned subsidiary of Batus, the U.S. unit of BAT Industries of London.

“As a result of those face-to-face meetings, Mr. Sheehy felt that a mutual trust had developed between them,” said Batus spokesman Wilson W. Wyatt. “Considering the complexity, seven days were not a long period of time.”

Bitter Battle

Investors showed keen interest in the deal, with 4.96 million shares of Farmers common stock changing hands, making it by far the most active issue in national over-the-counter trading. Farmers stock ended the day at $70, up 75 cents.

It had taken nearly nine months of sometimes bitter dueling between Batus, the ardent and aggressive suitor, and Farmers, the resolutely unwilling object of its desire. And Batus was forced to add $1 billion to its original $4.2-billion, or $60-a-share, offer (even though that bid had been 40% higher than Farmers’ $43 stock price at the time).

What eventually brought the two sides to the bargaining table was a new offer by Batus of $72 a share, or about $5 billion--an offer that Farmers management could scarcely ignore without incurring the wrath of institutional investors, who hold about two-thirds of the stock.

For Farmers, “the turning point came when the price was substantially increased and came into the range of fairness for the shareholders,” said Charles L. Schultz, senior vice president for finance. “At that point, it became a matter of dealing with non-financial issues.”

Those generally were insurance concerns raised by the autonomous exchanges that actually underwrite Farmers’ life, homeowner and auto insurance policies. Farmers collects management fees from the exchanges, each of which is governed by its own board of governors. As a result, separate agreements had to be reached with each exchange--as well as between Batus and Farmers Group.

“We had a fiduciary responsibility toward our shareholders,” Schultz acknowledged, “but we had to balance that with the interests of the exchanges we manage, and they had legitimate concerns that had to be dealt with.”

One of these concerns was resolved by placing all acquisition debt not on Farmers Group but on its new parent, Batus Inc., which also owns Marshall Field’s and Saks Fifth Avenue department stores and the nation’s third-largest cigarette maker. “Keeping the debt as far away from the insurer as possible does have a protective effect on the insurer,” he said.

Another assurance locked in the agreements with the exchanges is that Batus will not interfere with Farmers’ policy of offering insurance discounts to nonsmokers.

Platoon of Officials

Under the agreement, Wyatt said, Farmers’ common stock will be bought with capital provided by Batus, not by tapping into Farmers’ resources. The financing includes $3.2 billion in a revolving line of credit arranged by BAT Industries months ago in Britain through a consortium of international banks. The remaining cash will come from BAT Industries and Batus.

“No further borrowing is contemplated,” Wyatt said.

Hammering out these agreements and the overall definitive agreement kept a small platoon of company officials working through Batus’ initial deadline of 6 p.m. PDT last Friday--a deadline that both sides agreed to let pass without comment until the London stock market opened Monday morning. Great care was taken over the weekend to draft what became the first explicit indication that negotiations were not only seriously under way but “progressing satisfactorily.”

“It was largely a full-time occupation for probably six investment bankers, six lawyers spending full time, and lots of backup people in New York and Los Angeles--working some nights until 2 or 4 in the morning,” said Edward N. Robinson, Los Angeles director of mergers and acquisitions for First Boston Corp., Farmers’ financial adviser.

Once company executives had reached tentative accords on specific points, the legal and financial advisers would withdraw to separate meetings to put those agreements into mutually acceptable language. Various groups met at different locations, usually based on convenience “or where the necessary records were,” Robinson said. These took place at Farmers, in law offices and “sometimes at the Four Seasons and L’Ermitage (hotels)” where many of the participants were staying, he said.

In a brief interview Thursday, Farmers Chairman Denlea said he expects Batus’ resources to help Farmers carry out present expansion plans, including beginning to do business in Tennessee, a move already under way.

“There is nothing in our plans that would . . . upset Batus,” Denlea said. “They are also growth-minded. In the not too distant future, we will sit down with them and see how they might contribute to our plans.”

Under the agreement, Denlea, his management team and Farmers employees are to remain with the company. They also will receive employee benefits and pension plans comparable “in the aggregate” to what they currently receive.

Approval Predicted

The first task for Batus and Farmers will be to obtain approval from shareholders and from insurance commissioners in the nine states where Farmers subsidiaries have their headquarters. In a joint statement announcing the agreement Wednesday, the companies predicted that all necessary approvals will be achieved before year-end.

A regulatory hearing set for this morning in Topeka, Kan., was postponed as a result of the deal. Kansas and Texas have yet to rule on Batus’ fitness to conduct insurance in those states, but California, Arizona, Illinois and Ohio have given their approval despite Farmers’ previous strenuous opposition.

Denlea said he expects the agreements with Farmers insurance exchanges to satisfy all commissioner concerns--even those in Oregon, Washington and Idaho, which rejected Batus. He also said Farmers policyholders will not be affected by the acquisition.

While Batus and Farmers officials bask in the warmth of their new family relationship, some outsiders think, however, that success might have come with a good deal less rancor and cost.

“There was one point there (last spring) where Farmers seemed to become more conciliatory,” said Gerald S. Haims, who follows Farmers for institutional clients of Seidler Amdec Securities in Los Angeles. “Had Batus come in with $70 at that time, it might have saved them some money in per-share costs, not to mention legal and other fees.”

Haims and other analysts have maintained that Farmers’ main reason for finally agreeing to talk with Batus after the $72 offer Aug. 9 came mainly from fear that continued refusal would trigger a plethora of shareholder lawsuits.

“Now,” he said, “it’s sort of a face-saving thing on everybody’s part that a deal was concluded.”