Y Not?!

This is more than a year out of date, but I’m sure you all noticed that Alleghany was bought by BRK for $850 for cash. I wrote about this company here for a long time, and it was one of my favorite companies to watch / follow, even though I did consider them a bit too conservative / pessimistic. Just a tad, maybe. But it looks like it found a good home, so that’s good.

Someone asked about the valuation of MKL. I also wrote a lot in the past about the valuation of BRK, so valuing insurance companies and BRK-like conglomerates is something we are all interested in.

And when a public merger happens, the exciting thing about it is that we get to read the merger proxy (DEFM14A). These are fun to read as the background section tells the story of exactly how the merger unfolded, and then the valuation section shows how the investment bankers values the acquired company. Of course, the whole idea there is for the investment bankers to show the shareholders that the purchase price is ‘fair’ so that the deal actually happens, so there is obviously going to be some gaming going on there to make the numbers work. Nah, they wouldn’t do that, would they?

But, it is still fun to read through, even though it may not be full validation of any valuation. It might give you an idea.

Anyway, check out some snips below from the proxy.

Some Snips From the Merger Proxy

On the evening of March 7, 2022, Mr. Brandon and Warren E. Buffett, Chairman and Chief Executive Officer of Berkshire, met for dinner in New York City. Mr. Brandon, who took office as the Company’s Chief Executive Officer as of December 31, 2021 and previously had worked with Mr. Buffett as Chairman and Chief Executive Officer of Berkshire’s subsidiary General Re Corporation, had sent Mr. Buffett a copy of the annual letter to the Company’s stockholders, which accompanied the Company’s annual report, as the Company had done from time to time in prior years. Following receipt of the annual letter from Mr. Brandon, on February 25, 2022, Mr. Buffett suggested that they get together in New York or Nebraska.

After some casual conversation at the March 7 dinner meeting, Mr. Buffett conveyed Berkshire’s interest in acquiring the Company for $850 per share of common stock in cash, less any fee payable to the Company’s financial advisor, if the Board were interested in pursuing a transaction. He stated that Berkshire’s offer was not subject to any financing condition or any geopolitical risks and that Berkshire would not need to conduct any due diligence. Mr. Buffett indicated that if the Board were interested in pursuing a transaction at that price, Berkshire’s offer would be subject to both parties moving quickly to negotiate and announce a transaction. Mr. Buffett indicated that Berkshire would be willing to agree to a “go-shop” pursuant to which the Company would be able to solicit alternative proposals following execution of a merger agreement with Berkshire. Mr. Brandon said that he would convey Mr. Buffett’s offer to the Board, and would let him know if it were interested in pursuing a potential transaction.

…and then skip some stuff, the Y board agreed to have reps go to Omaha to meet Buffett…

On March 12, 2022, Mr. Kirby and Mr. Brandon met with Mr. Buffett in Omaha, Nebraska. Mr. Buffett confirmed the terms of his original offer and underscored Berkshire’s ability to provide closing certainty, reiterating that the offer was not subject to any due diligence nor would the closing be contingent upon Berkshire obtaining third-party financing. Mr. Brandon left the meeting and Mr. Kirby then met with Mr. Buffett one-on-one. Mr. Kirby asked Mr. Buffett to increase the price by increasing the $850 price per share or potentially by eliminating the deduction to the merger consideration for the fee payable to the financial advisor. Mr. Kirby also asked Mr. Buffett if he would consider using Berkshire’s stock as a portion of the deal consideration. Mr. Buffett reiterated the terms of his original offer, indicating firmly he did not intend to change his position on those points.

You can’t blame Kirby for trying, even if it is well-known that Buffett won’t budge on what he offers. Take it or leave it. He has a duty / obligation to try to get the best deal he can.

Valuation

And then let’s go down to the valuation part.

This analysis indicated that the price per share of Company common stock to be paid to the Company stockholders pursuant to the merger agreement represented:

	​	​	Implied Premium Represented by $848.02 Per Share of Company Common Stock Merger Consideration
Reference Price Per Share of Company common stock:	​	​
Current Share Price of $676.75	​	​	25.3%
Date of Berkshire Offer Share Price of $610.84	​	​	38.8%
Adjusted All-time High Share Price of $821.58	​	​	3.2%
52-Week High Price of $729.80	​	​	16.2%
52-Week Low Price of $598.73	​	​	41.6%
30-Day VWAP of $656.92	​	​	29.1%
90-Day VWAP of $663.01	​	​	27.9%
180-Day VWAP of $663.31	​	​	27.8%

Illustrative Dividend Discount Analysis

Using the Forecasts, Goldman Sachs performed an illustrative dividend discount analysis on the Company to derive a range of illustrative values per share for the Company’s fully diluted shares of Company common stock. Goldman Sachs discounted the estimated capital return to shareholders (in the form of dividend streams and share repurchases) from the Company for the period 2022 through 2024 as reflected in the Forecasts, which contemplate only share repurchases and no dividends, and the range of terminal values to derive present values, as of December 31, 2021, for the Company. Goldman Sachs calculated a range of terminal values for the Company by applying P/BV multiples ranging from 0.90x to 1.20x to the projected book value per share (including accumulated other comprehensive income (“AOCI”)) of the Company in 2024 as reflected in the Forecasts. These illustrative P/BV multiple estimates were derived by Goldman Sachs utilizing its professional judgment and experience, taking into account, among other things, the current and historical observed P/BV multiples for the Company. Goldman Sachs used a range of discount rates from 9.2% to 10.4%, reflecting estimates of the Company’s cost of equity. Goldman Sachs derived such estimated cost of equity by application of the capital asset pricing model, which requires certain company-specific inputs, including a beta for the Company, as well as certain financial metrics for the U.S. financial markets generally. This analysis implied a value of $599 to $807 per share of Company common stock (rounded to the nearest $1.00) as of December 31, 2021 (based on fully diluted shares of Company common stock outstanding as of March 18, 2022, as provided by the Company’s management).

Illustrative Present Value of Future Share Price Analysis

Goldman Sachs performed an illustrative analysis of the implied present value of an illustrative future value per share of Company common stock, which is designed to provide an indication of the present value of a theoretical future value of a company’s equity as a function of such company’s financial multiples. For this analysis, Goldman Sachs used the Forecasts for each of the fiscal years 2022 to 2024. Goldman Sachs first calculated and implied a range of theoretical future values per share of Company common stock as of December 31, 2022 through December 31, 2024, by applying illustrative P/BV multiples ranging from 0.90x to 1.20x to the Company’s projected book value per share of Company common stock (including AOCI) as of December 31 of each such year, per the Forecasts. These illustrative multiples were derived by Goldman Sachs utilizing its professional judgment and experience, taking into account current and historical observed P/BV multiples for the Company. Goldman Sachs then discounted to present value as of December 31, 2021 both the range of theoretical future values per share it derived for the Company and the estimated dividends to be paid per share of Company common stock through the end of the applicable period as reflected in the Forecasts using a discount rate of 9.8%, reflecting an estimate of the Company’s cost of equity. Goldman Sachs derived such estimated cost of equity by application of the capital asset pricing model, which requires certain company-specific inputs, including a beta for the Company, as well as certain financial metrics for the U.S. financial markets generally. This analysis resulted in a range of implied present values of $567 to $791 per share of Company common stock (rounded to the nearest $1.00).

Selected Precedent Transaction Analysis

Goldman Sachs analyzed certain publicly available information relating to certain acquisition transactions announced since 2014 involving target companies in the property and casualty insurance and reinsurance industry.

For each of the selected transactions, Goldman Sachs calculated and compared: (i) the equity value of each transaction as a multiple of the target company’s book value (including AOCI) as reported or calculated using publicly available financial information for the most recent financial period reporting date prior to the announcement (“P/BV multiples”) of the applicable transaction. While none of the target companies in the selected transactions are directly comparable to the Company and none of the selected transactions are directly comparable to the merger, the target companies in the selected transactions are companies with certain operations that, for the purposes of analysis, may be considered similar to certain operations of the Company.

The following table presents the results of this analysis:

Announced	​	​	Acquiror	​	​	Target	​	​	P/BV Multiple
October 28, 2021	​	​	Covéa Mutual Group Insurance Company	​	​	PartnerRe Ltd.	​	​	1.28x
October 29, 2018	​	​	RenaissanceRe Holdings Ltd.	​	​	Tokio Millennium Re AG	​	​	1.02x
August 28, 2018	​	​	Apollo Global Management, LLC	​	​	Aspen Insurance Holdings Limited	​	​	1.12x
March 5, 2018	​	​	AXA SA	​	​	XL Group Ltd	​	​	1.51x
January 22, 2018	​	​	American International Group, Inc.	​	​	Validus Holdings, Ltd.	​	​	1.57x
December 18, 2016	​	​	Fairfax Financial Holdings Limited	​	​	Allied World Assurance Company Holdings, AG	​	​	1.35x
October 5, 2016	​	​	SOMPO Holdings, Inc	​	​	Endurance Specialty Holdings Ltd.	​	​	1.36x
April 14, 2015	​	​	Exor SpA	​	​	PartnerRe Ltd.	​	​	1.10x
July 27, 2015	​	​	China Minsheng International Holding Pte. Ltd.	​	​	Sirius International Insurance Group, Ltd.	​	​	N/A
March 31, 2015	​	​	Endurance Specialty Holdings Ltd.	​	​	Montpelier Re Holdings Ltd.	​	​	1.21x
November 24, 2014	​	​	RenaissanceRe Holdings Ltd.	​	​	Platinum Underwriters Holdings, Ltd.	​	​	1.13x

…and then the usual projections that they say is meaningless, but is just used by the financial advisor for valuation etc.

Summary of the Unaudited Prospective Financial Information
(dollars in millions, except for per share data)

	​	​	Fiscal Year
	​	​	2022	​	​	2023	​	​	2024
Net Premiums Earned	​	​	$6,797	​	​	$7,595	​	​	$8,127
Book Value per share	​	​	$702	​	​	$789	​	​	$887
Diluted Book Value per share(1)	​	​	$692	​	​	$777	​	​	$874
Adjusted Earnings(2)	​	​	$839	​	​	$1,075	​	​	$1,219
Adjusted Return on Equity(3)	​	​	9.0%	​	​	11.1%	​	​	11.4%
Common Stock Repurchases(4)	​	​	$250	​	​	$250	​	​	$250

I think most people who look at this stuff would ignore the dividend discount model, projections and things like that, but would focus just on the past comparable acquisitions to see what similar businesses have been acquired for in the recent past. This is what people would call private market value; what is a business worth in an acquisition (versus in the public stock market).

The names in the list seem like pure insurance companies and not BRK-like conglomerates which Y is (as is MKL, Fairfax etc.), but I guess there are not many of those around to compare. Also, I don’t recall any BRK-alikes being acquired.

I remember when I did a lot of work on BRK a few years back, I thought I came up with something like 1.4x book is good, so Y at 1.3x book seems in the ball park. Who am I to argue against the financial advisors at Goldman Sachs, management and board of Y, and Warren Buffett? They all agree this is a fair price!

Anyway, Y had a great letter to shareholders so it’s sort of a bummer we have one less of those to read.

This deal is probably way better for BRK than for anyone else, as Y can utilize BRK’s fortress balance sheet. If the lower ROE / book value growth in recent years at Y was due to their conservatism (both in their investments and their float / equity management), being a part of Y would eliminate the need for them to be overly cautious, at least on the balance sheet (but Buffett would want them to still maintain their conservatism in underwriting insurance. But I’m sure they would be allowed to write bigger policies and whatnot. Of course, listed stocks will all be managed by Buffett and Co.) They can certainly add more value to BRK now than they would have been able to for Y shareholders on a standalone basis.

Anyway, all this talk made me write a bunch about BRK here, but then I realized that would be better as a separate post so I cut and pasted that stuff out of here into another post which I will make shortly.

So continues my little burst of posts. Again, do not extrapolate this unsustainable pace!